THE 

MODERN  CREDIT  COMPANY 

ITS  PLACE  IN  BUSINESS 

FINANCING 


THE 
MODERN  CREDIT  COMPANY 

ITS  PLACE  IN  BUSINESS 
FINANCING. 


BY 
ROBERT  G.  MERRICK,  Ph.  D.,  Econ. 


BALTIMORE 
THE  NORMAN,  REMINGTON  CO. 

1922 


Copyright,  1922,  By 
THE  NORMAN,  REMINGTON  CO. 


Published  July,  1922 


Printed  in  the  United  States  of  America  at  the  Prew  of  G.  ALFRED  PETERS  CO. 


TO  MY  FELLOW  COMRADES  OF  THE 
TENTH  FIELD  ARTILLERY,  UNITED 
STATES  ARMY,  WHO  MADE  THE 
SUPREME  SACRIFICE  DURING  THE 
WORLD  WAR. 


510190 


ACCIPE   DAQUE   FIDEM 


TABLE  OF  CONTENTS 

Page 
Introduction. 

Preface 1 

Chapter  I.  History  of  the  Credit  Company  in  the 
United  States 3 

A.  Bills  of  Exchange. 

B.  Classification  of  Finance  Companies,  Credit 

Companies  and  Discount  Houses. 

C.  The  Commission  House  and  the  Factor. 

D.  The   Assigned   Account    Business    on    the 

Non-Notification  Plan, 

E.  The  Financing  of  Articles  sold  on  the  Install- 

ment Plan. 
Chapter  II.   Description    of    the   Formation    and 

Functioning  of  the  Credit  Company 11 

A.  Formation 

1.  By  a  small  group  of  individuals. 

2.  Method  of  capitalization  employed. 

(a)  How  stock  is  usually  sold. 

(b)  Preferred  stock  and  common  stock. 


Page 
B.  Functioning. 

1.  How  it  uses  its  money. 

2.  How  it  increases  its  working  capital. 

(a)  Depository  banks. 

(b)  Brokers. 

(c)  Rates  paid  for  money. 

(d)  Interlocking  directorates. 

Chapter  III.  Types  of  Financing  performed  by  the 

Credit  Company 20 

A.  The  Purchase  of  Assigned  Accounts. 

1.  Non-Notification  Plan. 

(a)  Bonding. 

2.  What  classes  of  concerns  sell  their  ac- 

counts. 

3.  Charges. 

B.  The  Financing  of  Goods  sold  on  the  Install- 

ment Plan. 

1.  Automobiles. 

(a)  Wholesale  Plan. 

(b)  Retail  Plan. 

(c)  Insurance. 

2.  Furniture  and  similar  articles. 

Chapter  IV.   The  Assigned  Account  and  the  Trade 
Acceptance 36 

A.  Description  of  the  Trade  Acceptance. 

B.  Wherein  the  two  are  similar. 

C.  Their  respective  Advantages  and  Disadvan- 

tages. 

D.  Why  the  Trade  Acceptance  Movement  has 

grown  so  slowly. 


Page 
Chapter  V.    Analysis  of  the  Problem 47 

A.  The  Gap  in  the  Credit  Structure  which  the 
Commercial  Banking  Company  fills. 

1.  As  a  purchaser  of  Receivables. 

2.  In  financing  the  sale  of  goods  disposed 
of  on  the  installment  plan. 

B.  Attitude  of  Bankers. 
1.  Their  objections. 

C.  Conclusion. 

Chapter  VI.  Statistical  Data  concerning  Credit  Com- 

paniesin  the  United  States. 63 

A.  Their  Number. 

B.  The  Amount  of  Capital  they  represent. 

1.  Including  what  they  borrow. 

2.  The  turnover  on  their  capital. 

C.  Earnings. 

D.  Overhead. 


INTRODUCTION 

By  PROF.  JACOB  H.  HOLLANDER,  PH.D. 
Professor  of  Political  Economy, 
The  Johns  Hopkins  University. 

In  economic  affairs  as  in  organic  life  there  is  certain  to 
be  structural  adaptation  to  environmental  change.  That 
necessity  which  is  the  mother  of  invention  finds  here  its 
best  exemplification.  Let  the  business  world  develop  by 
growth  or  change  a  need  for  some  new  facility,  and  sooner 
or  later  the  exchange  mechanism  will  reshape  itself  by 
addition  or  amendment  to  satisfy  this  requirement. 

The  group  of  financial  institutions  whose  gradual  rise 
and  rapid  growth  Mr.  Merrick  has  described  in  the  follow- 
ing pages  represent  an  experience  of  this  kind.  Come  into 
existence  to  meet  a  specific  or  a  local  need,  their  spread 
and  increase  reflect  both  the  larger  occasion  for  such 
facilities  and  the  competent  manner  in  which  the  new  in- 
stitutions have  met  the  want. 

It  is  desirable  that  the  story  should  be  told  in  a  way  that 
will  satisfy  both  the  practical  need  of  business  men  and  the 
scientific  interest  of  economic  inquirers.  Mr.  Merrick's 
chapters,  reflecting  his  own  dual  equipment  as  student 
and  as  participant  in  affairs,  serve  this  joint  purpose.  His 
investigation  is  pioneer,  and  I  hope  very  much  that,  not 
content  with  blazing  a  serviceable  trail,  he  will  occupy 
definitely  the  field  of  which  he  here  makes  himself  a  pro- 
ductive student. 
THE  JOHNS  HOPKINS  UNIVERSITY 

March  7,  1922. 


PREFACE 

Baltimore  is  popularly  known  as  the  home  of  the  credit 
companies.  Their  activities  are  more  or  less  familiar  to 
the  average  business  man  of  that  city.  Being  a  resident 
of  Baltimore  this  subject  has  repeatedly  come  to  my  atten- 
tion. Among  certain  banking  and  credit  circles  it  has 
been  a  much  mooted  question  as  to  just  what  service  the 
credit  companies  perform.  What  are  the  functions  of  the 
credit  companies?  Can  their  activities  be  justified?  Do 
they  foster  overtrading?  Are  their  rates  ruinous?  These 
and  dozens  of  other  questions  have  been  spiritedly  asked 
and  just  as  spiritedly  answered.  There  have  been  many 
heated  arguments  pro  and  con. 

I  felt  that  the  truth  could  be  arrived  at  only  by  a  scien- 
tific and  cold-blooded  analysis  of  the  problem.  This  I 
have  endeavored  to  accomplish.  Every  effort  was  made 
to  obtain  the  opinions  both  of  those  in  favor  of  and  those 
opposed  to  the  credit  companies;  to  eliminate  as  far  as 
possible  the  personal  equation;  to  investigate  both  sides 
of  the  question  in  a  ruthless  and  unprejudiced  manner, 
and  to  set  forth  the  results  obtained. 

Most  of  the  material  was  obtained  by  means  of  ques- 
tionnaires, personal  interviews,  and  correspondence  with 
prominent  bankers  and  credit  company  officials.  I  wish  to 
express  to  these  individuals  my  utmost  appreciation  for 


their  generous  co-operation  and  assistance.  The  busiest 
executives  gave  me  unsparingly  and  unselfishly  of  their 
time,  and  aided  me  with  all  the  resources  at  their  com- 
mand. 

I  wish  to  express  particular  thanks  to  Mr.  A.  E.  Dun- 
can, Chairman  of  the  Boards  of  Directors  of  the  Commer- 
cial Credit  Company  of  Baltimore,  the  Commercial  Ac- 
ceptance Trust  of  Chicago,  and  the  Commercial  Credit 
Company,  Inc.,  of  New  Orleans;  Mr.  Arthur  R.  Jones, 
Managing  Partner  of  the  Continental  Credit  Trust  of 
Chicago;  Mr.  John  L.  Swope,  Vice-President  of  the  West- 
ern National  Bank  of  Baltimore;  Mr.  Albert  D.  Graham, 
President  of  the  Citizens  National  Bank  of  Baltimore;  all 
of  whom  have  read  part  or  whole  of  my  work  and  aided  me 
by  many  helpful  suggestions  and  criticisms. 

Mr.  John  L.  Little,  Secretary  of  the  National  Bond  and 
Investment  Company  of  Chicago;  Mr.  W.  H.  Crane, 
President  of  the  Finance  Service  Company  of  Baltimore; 
and  Mr.  M.  M.  Prentis,  former  Manager  of  the  Federal 
Reserve  Branch  Bank  at  Baltimore  have  all  supplied  me 
with  valuable  material  and  aided  in  other  ways.  Mr. 
William  J.  Flagg,  of  Baltimore,  has  helpfully  criticized 
the  composition  of  the  manuscript. 

To  the  members  of  the  Political  Economy  Seminary  of 
The  Johns  Hopkins  University,  and  especially  to  Dr.  Jacob 
H.  Hollander,  Professor  of  Political  Economy,  and  Dr. 
George  E.  Barnett,  Professor  of  Statistics,  do  I  wish  to  ex- 
tend my  deepest  appreciation  for  their  kindly  advice  and 
assistance. 


THE 
MODERN  CREDIT  COMPANY 

ITS  PLACE  IN  BUSINESS 
FINANCING. 

CHAPTER  I 

THE  HISTORY  OF  THE  CREDIT  COMPANY 
IN  THE  UNITED  STATES 

The  custom  of  borrowing  money  on  transactions  already 
entered  upon,  but  not  yet  consummated,  has  been  of  long 
practice.  For  centuries  cargoes  of  tea,  coffee  and  spices 
shipped  from  the  Dutch  East  Indies,  that  took  several 
months  to  come  around  the  Cape  of  Good  Hope,  prior  to 
the  building  of  the  Suez  Canal,  were  financed  in  Amster- 
dam on  the  arrival  of  the  documents  which  came  overland 
from  India  by  the  Caravan  Route  and  were  received 
some  months  in  advance  of  the  cargoes  themselves. 

It  is  a  well  known  fact  that  John  Jacob  Astor  borrowed 
money  in  New  York  on  documents  representing  shipments 


•   *,» 


4  THE   MODERN  CREDIT  COMPANY 

made  by  his  clipper  vessels  from  China.  The  documents 
came  to  Astoria,  Oregon,  and  were  forwarded  overland, 
arriving  in  New  York  several  months  ahead  of  the  goods. 
In  the  United  States  it  has  been  customary  for  banks  to 
advance  money  to  exporters  on  documentary  bills  of  ex- 
change (i.  e.  drafts  accompanied  by  bills  of  lading  or  other 
documents  drawn  on  some  banking  concern  abroad  with 
which  the  consignee  has  arranged  beforehand  to  honor).1 
It  might  be  said  that  such  loans  were  the  forerunners  of 
the  type  of  financing  practiced  by  THE  MODERN 
CREDIT  COMPANY. 

By  the  term  'credit  company'  is  meant  that  type  of  cor- 
poration which  loans  money  on  Receivables,  and  finances 
the  sale  of  articles  sold  on  the  installment  plan.  The 
terms  'finance  company'  or  'discount  house'  2are  often  used 
synonymously  for  the  term  'credit  company'.  These  names 
should,  however,  be  employed  for  other  types  of  corpora- 
tions. For  purposes  of  convenience,  and  following  logically 
from  the  names  themselves,  the  author  employs  the  above 
three  terms  as  follows:  (1)  Finance  companies,  as  desig- 
nating corporations  that  deal  in  real  estate  mortgages,  and 
perform  a  general  and  miscellaneous  financing  of  business 
enterprises  of  all  descriptions.  (2)  Credit  Companies, 
which  deal  in  (a)  Receivables,  that  is,  the  accounts  re- 
ceivable of  business  firms,  and  (b)  the  financing  of  ar- 

1  See  "The  Development  of  Mercantile  Instruments  of  Credit  in  the  United 
States,''  by  Joseph  J.  Klein,  Journal  of  Accountancy,  Volume  13,  1912. 

2  The  terms  Commercial  Banking  Company  and  Commerical  Acceptance  Com- 
pany are  also  employed,  and  in  the  author's  opinion  these  two  are  proper  terms. 


CLASSIFICATION  5 

tides  sold  on  the  installment  plan,  such  as  automobiles, 
furniture,  musical  instruments,  etc.  (3)  Discount  Com- 
panies which  discount  Bankers'  and  Trade  Acceptances. 

Neither  finance  nor  discount  companies  are  treated  of 
in  this  paper.  It  is  true  that  certain  credit  companies  do 
perform  types  of  general  financing,  as  certain  finance  com- 
panies likewise  purchase  accounts  receivable,  and  finance 
articles  sold  on  the  installment  plan.  However,  the  bulk 
of  the  financing  done  by  the  two  is  essentially  different,  so 
it  is  believed  best  to  keep  them  separate. 

The  credit  company  is  a  financial  institution  which 
makes  it  possible  for  certain  classes  of  business  men,  who 
have  extended  credit  to  their  customers,  to  convert  this 
credit  into  cash  to  be  used  in  the  further  conduct  of  their 
business. 

Unlike  the  practices  of  many  European  countries  the 
merchant  in  the  United  States  extends  credit  to  his  cus- 
tomers for  from  30  to  90  days,  usually  allowing  a  small  dis- 
count for  cash  payment.  During  this  period  of  accommo- 
dation billions  of  dollars  are  thus  tied  up  in  what  are 
familiarly  known  as 'frozen  credits'.  Nearly  every  merchant 
in  the  country,  except  those  who  do  only  a  strictly  cash 
business,  has  money  owed  him  for  merchandise  and  goods 
delivered  to  his  customers.  These  bills  receivable  are  pop- 
ularly spoken  of  as  'open  accounts'.  It  is  only  within  the 
last  two  decades  that  banking  corporations  have  been 
formed  to  loan  money  on  these  non-liquid  assets.  In  a 


6  THE  MODERN  CREDIT  COMPANY 

country  the  size  of  the  United  States  it  is  difficult  to  say 
exactly  when  the  credit  company  first  came  into  existence. 
It  is,  however,  possible  to  state  when  the  idea  began  to 
assume  importance.  It  is  known  that  the  loaning  of 
money  on  open  book  accounts  antedates  the  formation  of 
the  credit  company.  Prendergast  in  his  book,  "Credit  and 
Its  Uses,"  published  in  1906,  says  "It  is  probable  that  this 
method  found  its  inception  in  a  practice  introduced  some 
years  ago,  whereby  a  house,  having  no  other  form  of  col- 
lateral to  offer  its  bank  and  being  much  in  need  of  money, 
induced  its  bank  to  accept  an  assignment  of  certain  ac- 
counts. Advances  were  made  by  the  bank  to  an  agreed 
percentage  of  the  gross  amount  of  the  accounts  assigned- 
This  was  an  entirely  private  arrangement  between  the 
bank  and  its  customers.  When  the  bank  had  confidence 
in  the  integrity  of  the  assignor  and  in  the  prospects  of  the 
business,  it  would  permit  the  assignor  to  use  the  funds  col- 
lected from  the  accounts  assigned  and  in  place  of  these 
collected  accounts,  other  and  supposedly  desirable  ac- 
counts were  assigned  to  the  bank,  thus  preserving  the  re- 
quired ratio  of  margin.  It  will  be  evident  that  a  bank  lend- 
ing under  such  conditions  must  have  a  good  deal  of  con- 
fidence in  the  character  and  good  intentions  of  the  bor- 
rower for  an  unscrupulous  person  could  deceive  and  de- 
fraud his  banker.  In  the  event  of  the  failure  of  the  bor- 
rower, or  of  any  suspense  in  the  relations  between  the  bank 
and  him,  the  bank  would  naturally  enter  upon  the  exercise 


THE  COMMISSION   HOUSE  AND  THE  FACTOR  7 

of  its  rights  under  the  assignment,  and  the  persons  owing 
the  accounts  which  had  been  assigned  would  be  notified 
to  make  payment  to  the  bank.  In  some  instances,  the 
notice  of  the  assignment  would  be  sent  at  the  time  of  its 
execution,  and  the  debtors  called  upon  to  make  payment 
to  the  bank." 

This  latter  method  has  been  resorted  to  in  the  textile 
trade  for  the  last  fifty  years  or  more  by  private  bankers, 
factors  and  commission  houses  in  New  York  City. »  These 
firms  filled  the  orders  of  salesmen  by  buying  raw  material, 
working  it  up  into  the  finished  product,  shipping  and  bill- 
ing it  in  their  name  for  the  account  of  clients.  The  sales- 
men then  assigned  the  accounts  over  to  the  banker  or 
factor,  who,  for  his  own  protection,  when  the  original  in- 
voices were  sent  to  the  debtors,  thereupon  notified  the 
debtors  of  the  assignment,  and  that  payment  must  be 
made  direct  to  him  (the  factor.) 

The  services  of  "The  Bradstreet  Company,"  one  of  the 
two  national  credit  agencies,  were  employed  by  the  author 
to  discover  certain  statistical  facts  about  credit  companies. 
The  dates  of  incorporation  of  all  the  credit  companies  in 
the  United  States  were  among  some  of  the  data  obtained. 
As  far  as  could  be  ascertained  the  first  company  formed 
solely  to  purchase  open  book  accounts  was  the  Mercantile 
Credit  Company  of  Chicago.  This  concern  was  organized 

1  See  "The  Sale  of  Open  Accounts  Receivable,"  by  A.  E.  Duncan,  published  in 
"The  Bankers  Magazine,"  Volume  Cl.  November,  1020. 


8  THE  MODERN  CREDIT  COMPANY 

in  1905  by  Messrs.  John  L.  Little  and  Arthur  R.  Jones. 
The  former  when  questioned  upon  the  formation  of  his 
company  furnished  the  following  information: 

In  the  summer  of  1904  he  was  engaged  in  the  sale  of  the 
Encyclopedia  Americana.  As  this  work  was  sold  on  the 
monthly  payment  plan,  it  did  not  take  him  long  to  exhaust 
his  working  capital.  At  that  juncture  he  happened  to 
meet  Mr.  Arthur  R.  Jones,  who  financed  him  on  his  in- 
stallment contracts.  Their  relations  resulted  in  the  for- 
mation of  a  partnership,  the  object  of  which  was  to  form 
a  corporation  devoted  solely  to  the  purchase  of  open  book 
accounts.  Mr.  Jones  states  that  their  principal  thought 
was  to  standardize,  elevate,  and  give  respectability  to  this 
type  of  commercial  banking,  three  features  that  were  lack- 
ing particularly  in  his  community.  Before  the  Mercantile 
Credit  Company  was  formed,  Mr.  Little,  at  Mr.  Jones' 
suggestion,  spent  several  weeks  in  New  York  City,  in- 
vestigating the  various  financial  concerns  operating  there . 
He  found  many  large  corporations  and  financial  concerns 
of  the  factor  and  commission  house  type,  but  nothing  that 
would  help  him  materially  in  his  new  project. 

Mr.  Little  relates  his  initial  problems  as  follows:  "Tne 
first  six  months  were  devoted  largely  to  laboratory  experi- 
ments. The  schedule  or  bill  of  sale  had  to  be  worked  out. 
This  was  a  legal  proposition  of  no  mean  proportions.  We 
proceeded  on  the  theory  that  an  assigned  account  would 
have  to  be  collected  by  the  assignee,  but  in  actual  experi- 


ASSIGNED  ACCOUNT  ON   NON-NOTIFICATION   PLAN 

ence  we  found  that  manufacturers,  jobbers  and  wholesale 
dealers  in  good  standing  were  unwilling  to  make  an  open 
assignment  of  their  accounts.  They  thought  to  do  so  was 
an  acknowledgment  of  financial  weakness,  and  might  re- 
flect discredit  upon  the  people  to  whom  they  sold.  It  was 
obviously  necessary  to  overcome  this  obstacle/'  About 
that  time  the  Supreme  Court  of  Illinois  handed  down  a 
decision  to  the  effect  that  a  man  could  assign  his  wages  and 
appoint  himself  as  agent  with  irrevocable  powers  to  collect 
the  same  for  the  benefit  of  the  lender.  This  furnished  Mr. 
Jones  and  Mr.  Little  a  clue  to  the  solution  of  their  diffi- 
culties, and  in  time  resulted  in  the  drawing  of  an  Agency 
Contract,  providing  for  the  collection  of  an  account  by  the 
assignor  as  the  Agent  of  the  assignee;  in  other  words  what 
is  known  as  the  Non-Notification  Plan,  which  will  later  be 
described  in  more  detail.  The  Agency  Contract  has  been 
changed  from  time  to  time  to  meet  changing  conditions, 
but  the  basic  idea  has  remained  unaltered. l 

In  addition  to  the  assigned  account  business  some  of  the 
credit  companies  finance  different  concerns  which  sell  ar- 
ticles on  the  installment  plan;  such  as  automobiles,  fur- 
niture, farming  implements,  musical  instruments,  electrical 
appliances,  gas  heaters,  and  many  other  commodities.  In 
some  cases  the  credit  company  does  not  handle  accounts 
receivable,  but  only  the  financing  of  the  sale  of  a  particular 
article  or  articles. 

1  See  Appendix  for  reprint  of  a  type  of  Agency  Contract  now  in  general  use. 


10  THE  MODERN  CREDIT  COMPANY 

The  credit  company  movement  spread  from  Chicago  to 
Baltimore  and  New  York;  and  thence  over  the  entire 
country.  Today  there  are  over  one  hundred  and  twenty- 
five1  of  these  concerns,  in  nearly  all  of  the  industrial 
states  of  the  Union.  This  rapid  growth,  however,  has 
not  been  without  its  attendant  obstacles  and  difficulties. 
The  notification  bankers  have  instituted  legislation  in  dif- 
ferent states  to  force  the  non-notification  banker  out  of 
existence.2  Receivers  were  loath  to  acknowledge  the 
priority  of  assignments.  The  commercial  bankers  objected 
on  different  grounds.  These  objections  are  treated  of  at 
greater  length  in  Chapter  V.  Suffice  it  to  say  that  the 
credit  companies  are  emerging  triumphant  from  the 
struggle  with  their  competitors,  although  the  contest,  in 
some  states,  is  by  no  means  over  as  yet. 

In  the  following  two  chapters  a  description  of  the  for- 
mation and  functioning  of  the  credit  company  and  the 
types  of  financing  it  performs  is  presented  in  detail. 

1  That  is,  companies  which  purchase  open  book  accounts,  and  finance  individuals 
or  firms  which  sell  articles  on  the  installment  plan. 

2  See  "The  Sale   of  Open  Accounts  Receivable,"  by  A.  E.  Duncan,  published  in 
"The  Bankers  Magazine,"  Volume  Cl  November,  1920. 


CHAPTER  II 

DESCRIPTION   OF   THE   FORMATION   AND 
FUNCTIONING  OF  CREDIT  COMPANIES. 

Credit  companies  are  formed  by  an  individual  or  group 
of  individuals  obtaining  a  charter  from  one  of  the  States  of 
the  Union;  usually  from  one  where  the  State  laws  are 
favorable  to  such  companies, l  and  where  the  taxes  are  not 
exorbitant.  The  authorized  capitalization  is  almost  in- 
variably composed  of  a  certain  amount  of  preferred  and 
common  stock.  The  preferred  stock  is  very  similar  to  the 
preferred  stocks  of  modern  industrial  corporations,  with 
many  of  their  preferences  and  limitations.  The  par  value 
of  the  respective  stocks  is  made  to  serve  best  the  needs  of 
the  organizers.  The  general  practice  is  to  employ  one  of 
the  following  forms  of  capitalization:  (1)  to  make  both 
types  of  stock  of  equal  par  value;  (2)  the  preferred  from 

1  It  is  interesting  to  note  that  of  one  hundred  and  twenty  of  these  companies,  of 
which  information  was  obtained,  forty-five  are  incorporated  under  the  laws  of  Delaware. 

11 


12  THE  MODERN  CREDIT  COMPANY 

ten  to  one  hundred  dollars  par  value,  and  the  common  of 
no  par  value,  or  of  any  convenient  par  value;  (3)  the  pre- 
ferred from  ten  to  one  hundred  dollars  par  value  and  the 
common  of  one  dollar  par  value.  In  certain  states  a  large 
saving  in  taxes  can  be  effected  by  this  last  method.1  For 
the  stock  of  no  par  value  is  often  taxed  on  the  basis  of  one 
hundred  dollars  par  value,  while  that  of  one  dollar  par 
value  is  taxed  only  on  that  amount. 

The  stock  is  usually  underwritten  by  some  banking 
firm8  which  sells  it  to  the  public.  As  in  most  new  flotations 
the  organizers  purchase  for  themselves  a  large  block  of 
the  common  stock,3  and  sell  the  preferred  to  the  public 
with  a  small  portion  of  the  common.  With  every  one  hun- 
dred dollars  worth  of  preferred  stock  purchased  the  inves- 
tor may  be  given  or  sold  from  one- tenth  to  two  whole  shares 
of  common,  depending  on  the  ratio  between  the  amount  of 
preferred  and  common  stock  authorized.  In  order  to  show 
the  great  variety  and  different  modes  of  business  in  which 
the  typical  credit  corporation  is  allowed  to  engage  there 
follows  a  brief  excerpt  from  the  certificate  of  incorporation 
of  one  of  the  larger  companies  in  the  East.  Many  other 
companies  have  copied  this  wording  almost  verbatim.4 

"The  objects  and  purposes  for  which  and  for  any  of 
which  this  corporation  is  formed  are 

1  See  Maryland  Code  of  General  Laws,  and  Delaware  Code  of  General  Laws. 

2  Sometimes  a  group  of  individuals  will  underwrite  the  stock  themselves  and  dis- 
pense with  the  services  of  a  banking  firm. 

3  Not  always  the  case. 

4  From  articles  of  incorporation  of  "The  Commercial  Credit  Company  of  Balti- 
more. Maryland." 


ARTICLES  OF  INCORPORATION  13 

To  buy,  sell,  pledge,  exchange,  dispose  of,  hold  and  own 
open  accounts,  commercial  paper,  bills  of  lading,  ware- 
house receipts,  bonds  and  securities,  contracts,  including 
personal  property,  leases  and  choses  in  action  of  any  and 
every  kind,  nature  and  description. 

To  enter  into,  make,  perform  and  carry  out  contracts 
of  every  kind,  for  any  lawful  purpose,  without  limit  as  to 
amount,  with  any  person,  firm,  association  or  corporation. 

To  issue  bonds,  debentures  or  obligations  of  the  cor- 
poration from  time  to  time,  for  any  of  the  objects  or  pur- 
poses of  the  corporation,  and  to  secure  the  same  by  mort- 
gage, pledge,  deed  of  trust  or  otherwise  ...  To  purchase  or 
acquire  to  hold,  own,  to  mortgage,  sell,  convey  or  dispose 
of  real  and  personal  property  of  every  class  and  description 
in  any  of  the  States,  Districts,  Territories  or  Colonies  of 
the  United  States,  and  in  any  or  all  foreign  territories,  sub- 
ject to  the  law  of  such  State,  District,  Territory,  Colony 
or  Country." 

After  directors  and  officers  have  been  elected,  and  the 
money  received  from  the  sale  of  its  securities,  the  credit 
company  is  prepared  to  commence  business.  It  usually 
employs  one  or  more  solicitors  who  endeavor  to  obtain  as 
customers  well  rated  manufacturers,  jobbers  and  mer- 
chants. The  solicitors'  efforts  are  generally  supplemented 
by  advertising,  circular  letters,  etc.  Loans  are  now  made, 
the  credit  corporation  receiving  as  security  such  collateral 
as  notes,  assigned  accounts,  warehouse  receipts,  accept- 


14  THE  MODERN  CREDIT  COMPANY 

ances,  bills  of  lading,  liens  of  various  descriptions,  etc. 

The  credit  company  makes  use  of  this  collateral  in  a 
manner  very  similar  to  that  which  is  employed  by  the 
member  banks  of  the  Federal  Reserve  Banking  System  in 
increasing  their  working  capital.  A  great  amount  of  the 
commercial  paper  which  these  banks  hold  in  their  port- 
folios is  eligible  for  rediscount  with  the  central  Federal 
Reserve  Banks  of  their  respective  districts.  The  Central 
Bank  gives  the  member  banks  credit  in  return  for  the  re- 
discounted  commercial  paper.  Although  the  credit  com- 
pany is  not  allowed  by  law  to  rediscount  its  paper  with  the 
Federal  Reserve  Bank,  it  employs  the  next  best  procedure. 
It  has  already  ratified  a  collateral  trust  agreement,  by  con- 
sent of  its  stockholders,  with  a  trustee,  with  whom  it  de- 
posits the  collateral  which  has  been  received  as  security 
for  its  loans.  This  collateral  is  properly  assigned  and  trans- 
ferred to  the  trustee  with  the  full  right  and  power  to  exer- 
cise all  the  rights  and  privileges  conferred  on  the  credit 
company  by  the  original  holder.  Against  it  are  issued  the 
credit  company's  own  notes  to  the  extent  of  about  seventy- 
five  to  eighty  per  cent1  of  the  collateral.  The  credit  cor- 
poration has  the  right  to  increase  the  issue  of  its  notes  up 
to  the  figure  provided  for  in  the  Collateral  Trust  agree- 
ment, but  they  are  never  to  exceed  seventy-five  or 
eighty  per  cent1  of  the  face  value  of  the  collateral  assigned 


1  These  figures  may  vary  from  about  seventy-i 
different  companies.  On  some  types  of  high-grad* 
utent  of  eighty-five  per  cent  of  the  collateral. 


•  vary  from  about  seventy-five  to  eighty-five  per  cent  with  the 

ie  collateral,  notes  are  issued  to  the 
extent  of  eighty-five  per  cent  of 


METHOD  OF  FINANCING  EMPLOYED  15 

to  the  trustee.  The  credit  company  also  has  power  to  de- 
crease the  amount  of  notes  outstanding,  and  to  substitute 
other  collateral  or  cash  for  that  previously  assigned;  the 
notes,  however,  in  no  event  are  ever  to  exceed  seventy-five1 
per  cent  of  the  face  value  of  the  collateral  or  cash  actually 
assigned  and  held  by  the  Trustee. 

The  credit  corporation  further  guarantees  its  title  to  all 
collateral  assigned  to  the  Trustee.  The  Trustee  in  turn  is 
not  responsible  or  liable  for  the  genuineness,  validity  or 
collectibility  of  the  collateral,  nor  for  fraud  on  the  part  of 
the  credit  company.  He  merely  sees  that  the  amount  of 
collateral  is  sufficient  to  cover  the  issue  of  notes  in  accor- 
dance with  the  terms  of  the  agreement.  He  is  also  em- 
powered to  act  for  the  noteholders  in  case  of  default  of 
interest  or  principal  on  the  notes.2 

These  notes  are  placed  with  different  banks  and  indi- 
viduals. They  consist  of  short  term  paper  running  from 
one  to  twelve  months,  and  bearing,  usually,  from  six  to 
eight  and  one-half  per  cent  interest  per  annum,  depending 
upon  the  credit  of  the  company;  the  laws  of  the  different 
states;  the  type  of  bank  taking  the  notes,  whether  a  state 
or  a  national  bank;  and  the  market  rate  of  interest  at  that 
time. 

The  custom  of  many  of  the  credit  companies  is  to 
borrow  principally  from  their  depository  banks,  keeping  a 

1  See  footnote  on  page  14. 

2  Taken   from  an  examination  of  several  collateral  trust  agreements  entered  into 
by  different  companies  with  their  respective  trustees. 


16  THE  MODERN  CREDIT  COMPANY 

twenty  per  cent  balance  of  their  credit  line  on  deposit  and 
in  addition  paying  the  usual  over-the-counter  rate  for 
loans,  and  liquidating  once  a  year  for  a  period  of  from  one 
to  three  months.  During  the  recent  times  of  tight  money 
bankers  have,  in  some  instances,  required  the  credit  com- 
panies, in  the  placing  of  their  notes  to  leave  a  very  large 
balance  on  deposit,  thus  making  the  rate  paid  by  the  credit 
corporation  as  high  as  ten  or  eleven  per  cent.1 

The  notes  of  well  established  credit  companies  are  re- 
garded by  most  bankers  as  a  prime  investment.  In  fact, 
the  writer  has  made  many  inquiries  but  has  been  unable  to 
learn  of  any  case  of  a  credit  company  defaulting  on  its 
collateral  trust  notes.  This  is  not  surprising,  as  they  are  a 
direct  first  lien  obligation  of  the  credit  company,  and  are 
secured  by  (1)  the  obligation  of  the  original  "Payee"  of 
each  account  (there  may  be  as  many  as  several  thousand 
of  these  responsible  debtors);  (2)  the  guarantee  of  the 
"Seller;"  (3)  the  minimum  margin  of  twenty  to  forty  per 
cent,  the  exact  figures  depending  on  the  particular  com- 
pany; and  (4)  the  assets  of  the  credit  company. 

Besides  placing  these  notes  with  their  depository  banks 
the  credit  corporations  sell  them  through  a  brokerage  house 
to  banks  and  individual  investors.  The  brokerage  house 
agrees,  as  a  rule,  to  keep  a  certain  amount  outstanding  at 
all  times.  It  is  usually  paid  anywhere  from  one-half  to 
one  and  one-half  per  cent  per  annum  on  the  amount 

1  The  author  knows  of  many  such  CMC*. 


INTERLOCKING  DIRECTORATES          17 

outstanding.  Or  the  credit  company  may  market  its  own 
notes  direct  to  the  banks  and  the  individual  investor.  Or 
it  may  be  that  one  or  two  banks  or  trust  companies  are 
fostering  the  credit  company.  The  bank's  officers  may  be 
directors  in  the  credit  corporation.  The  bank  or  trust 
company  may  accommodate  the  credit  company  by  hand- 
ling all  of  its  collateral  trust  notes  itself  until  the  latter 
gets  thoroughly  on  its  feet.  In  other  words  the  bank  or 
trust  company  is  foster  parent  to  the  credit  company. 1  In 
some  cases  the  credit  company  may  be  backed  by  several 
banks.  Certain  of  the  officers  of  these  banks  may  have 
been  the  organizers  of  the  credit  corporation.  In  that  case 
the  latter  finds  it  very  easy  to  keep  its  collateral  trust  notes 
outstanding,  and  usually  without  being  forced  to  pay  a 
broker  to  place  them.2 

With  the  money  that  the  credit  company  obtains  from 
these  notes  it  can  make  further  loans,  and  the  collateral 
which  it  obtains  from  these  loans  can  in  turn  be  deposited 
with  the  trustee  and  more  collateral  notes  issued  against 
them.  This  collateral  consists  of  drafts,  acceptances,  bills 
of  exchange,  motor  lien  retail  time  sales  and  storage  notes, 
warehouse  receipts,  and  other  liens.  The  credit  companies3 
that  perform  general  financing,  in  conjunction  with  their 
assigned  account  and  installment  financing  business,  have 

1  City  banks  often  "farm"  these  notes  out  to  county  banks  at  one-half  of  one  per 
cent  less  than  it  paid  for  them. 

2  The  author  knows  of  one  such  company  where,  out  of  twenty  organizers,  fifteen 
are  bank  officials.     This,  however,  is  very  unusual. 

3  The  term  FINANCE  COMPANIES  would  be  more  appropriate  for  this  type  of  con- 
cern. 


18  THE  MODERN  CREDIT  COMPANY 

many  other  types  of  collateral  such  as  mortgages,  stocks, 
bonds,  etc.  It  is  possible  that  eventually  collateral  trust 
notes  of  this  type  of  company  will  be  secured  by  different 
kinds  of  collateral — graded,  guaranteed  and  selected  to 
meet  the  investors'  requirements.  At  the  present  time  very 
few  of  the  credit  companies  classify  the  collateral  which  is 
security  for  their  notes. 

The  officers  of  a  well  managed  credit  company  will  see  to 
it  that  its  collateral  trust  notes  mature  evenly  throughout 
the  year;  or  if  it  is  a  specialized  credit  company,  the  notes 
will  run  to  meet  the  requirements  of  the  trade  which  the 
company  is  financing. 

A  later  stage  in  the  development  of  the  credit  corpora- 
tion is  the  issuance  of  a  second  preferred  stock  which  is 
junior  to  the  collateral  trust  notes  and  the  first  preferred. 
This  usually  bears  a  higher  rate  of  interest  than  the  first 
preferred,  and  amounts  to  renting  the  money  from  the 
purchasers  of  the  stock  at  a  permanently  high  rate.  It  is 
similar  to  the  type  of  second  preferred  stock  issued  by  large 
industrial  corporations  and  railroads.  The  credit  company 
is  not  in  a  position  to  have  this  second  preferred  stock  ab- 
sorbed by  the  public,  unless  it  has  had  a  very  good  record 
and  the  second  preferred  is  protected  by  a  substantial  sur- 
plus and  a  very  valuable  common  stock.  In  fact,  this 
issue  of  stock  is  very  often  much  safer  than  the  first 
preferred  was  when  it  was  issued.  Occasionally  a  small 


SECOND  PREFERRED  STOCK  19 

amount  of  the  common  stock  is  allowed  to  be  purchased 
along  with  the  second  preferred. 

What  may  perhaps  become  a  noticeable  feature  of  many 
of  the  credit  companies  is  the  formation  of  a  trust  com- 
pany. This  is  comparatively  easy  to  form,  as  stock  can  be 
sold  to  the  credit  company's  own  satisfied  stockholders' 
The  credit  corporation's  customers  also  need  little  urging 
to  carry  their  accounts  with  the  new  trust  company1.  In 
addition  the  credit  company  has  its  own  account  which  it 
can  carry  there,  and  it  is  in  a  position  to  turn  over  to  the 
trust  company  a  good  deal  of  business  suited  primarily  to 
banks2. 


1  The  trust  company  proves  of  great  convenience  in  handling  the  credit  corpora- 
tion's out-of-town  business. 

2  A  credit  corporation  executive  recently  made  the  following  statement  to  the 
author:  "We  hope  soon  to  form  a  trust  company;  and  when  this  gets  thoroughly  on 
its  feet,  our  idea  is  to  have  a  bond  department,  a  real  estate  mortgage  department,  and 
a  stock-selling  department,  selling  stock  in  enterprises  we  finance,  backed  up  by  our 
guarantee.  In  other  words  we  want  a  financial  "wheel,"  and  when  any  proposition  is 
presented  to  us  it  will  then  only  be  a  question  as  to  which  spoke  of  the  wheel  it  belongs  to." 


CHAPTER   III 

TYPES   OF    FINANCING  PERFORMED  BY  THE 
CREDIT  COMPANY. 

There  are  two  main  types  of  financing  which  the  credit 
companies  perform:  (1)  The  purchasing  of  open  book  ac- 
counts. (2)  The  financing  of  a  particular  trade  or  trades. 
It  is  the  practice  of  some  of  the  credit  companies  to  handle 
only  the  former,  of  others  only  the  latter,  while  still  others 
engage  in  a  combination  of  the  two  types.  It  has  al- 
ready been  explained  how  there  flourished  in  certain 
trades  a  type  of  factors  or  bankers  who  loaned  money  on 
open  book  accounts.  These  accounts  were  assigned  over 
to  the  factor  or  banker  and  notice  of  the  assignment  was 
given  on  the  original  invoice  sent  to  the  debtor  (the  one 
who  owed  the  firm  assigning  the  account)  that  payment 
must  be  made  direct  to  the  factor  or  banker. 

The  method  used  by  most  of  the  credit  companies  differs 

20 


NON-NOTIFICATION  PLAN  21 

from  the  above  in  that  the  debtor  is  not  notified  on  the 
original  invoice  of  the  assignment,  or  at  all,  for  that  matter; 
and  that  the  credit  corporation  trusts  in  the  honesty  of  the 
assignor  to  collect  the  account  and  forward  it  to  the  credit 
company.  The  assignor  also  guarantees  the  payment  of 
the  account,  both  corporately  and  individually.  It  can 
clearly  be  seen  that  under  the  Non-Notification  Plan 
(where  the  debtor  is  not  notified  of  the  assignment)  the 
credit  company  must  be  very  careful  as  to  the  moral  and 
financial  responsibility  of  the  assignor.  Frequently  the 
credit  corporation  will  refuse  to  buy  an  account  under  the 
Non-Notification  Plan,  but  will  handle  the  same  account 
under  the  Notification  Plan.  This  is  done  when  the  banker 
is  unwilling  to  trust  to  the  integrity  of  the  seller  of  the  ac- 
count. Under  the  Non-Notification  Plan  the  credit  com- 
pany has  two  parties  to  which  it  has  recourse  in  case  of 
non-payment  and  either  of  which  can  then  be  sued.  How- 
ever, the  terms  of  the  assignment  may  also  be  such  under 
the  Notification  Plan  that  the  assignor  guarantees  the 
account. 

By  many  the  Non-Notification  Plan  has  been  called 
secret.  It  is  only  more  secret  than  the  Notification  Plan 
to  the  extent  that  the  firm's  customer  is  not  aware  of  the 
assignment.  Creditors  have  no  way  of  finding  out  whether 
a  firm  sells  its  accounts  or  not,  unless  the  question  is 
directly  asked.  So  any  criticism  of  the  Non-Notification 
Plan  on  the  ground  that  it  is  secret  can  be  held  applicable 
only  to  the  debtor.  And  what  advantage  can  it  be  to  him 


22  THE  MODERN  CREDIT  COMPANY 

to  know  that  his  creditor  is  or  is  not  assigning  his  book 
account?  He  might,  perhaps,  regard  it  as  a  sign  of  financial 
weakness,  and,  of  course,  the  same  criticism,  even  if  valid, 
would  apply  to  the  Notification  Plan! 

Below  is  the  reasoning  of  Mr.  A.  E.  Duncan,  Chairman 
of  the  Boards  of  Directors  of  the  Commercial  Credit  Com- 
pany of  Baltimore,  the  Commercial  Credit  Company,  In- 
corporated, New  Orleans,  and  the  Commercial  Acceptance 
Trust,  Chicago,  on  this  matter,  and  it  seems  to  be  well 
founded l : 

"A  few  years  ago,  when  the  Non-Notification  business 
was  being  developed  and  the  total  volume  rather  small,  a 
misguided  effort  was  made  in  certain  credit  circles  to  pass 
laws  which,  if  enacted,  would  clearly  have  been  class  legis- 
lation, the  expressed  purpose  being  to  prevent  fraud 
through  the  'secret'  assignment  of  accounts  and  to  enable 
creditors  of  a  firm  which  was  assigning  its  accounts  to  be 
informed  thereof.  The  bills,  in  fact,  prohibited  the  assign- 
ment of  accounts  unless  the  banker  gave  notice  thereof  on 
invoices  sent  the  debtors  (Notification  Plan),  but  made  no 
effort  at  all  to  restrict  or  make  public  the  assignment  of 
accounts  if  such  notice  were  given,  it  being  contended  that 
if  such  notice  were  given,  the  news  would  'leak  out'  and 
finally  reach  creditors. 

"It  has  never  been  made  quite  plain  just  how  Boston 
creditors  of  a  Philadelphia  manufacturer  were  expected 

1  See  "The  Sale  of  Open  Accounts  Receivable,"  by  A.  E.  Duncan,  published  in 
"The  Bankers  Magazine,"  Volume  Cl,  November,  1020. 


NON-NOTIFICATION   PLAN  23 

to  find  out  that  the  Philadelphia  firm  was  assigning  its  ac- 
counts to  a  New  York  Notification  banker,  simply  because 
such  banker,  to  protect  his  own  interest,  gave  notice  of  the 
assignment  on  the  original  invoices  sent  to  customers  in 
Chicago,  St.  Louis,  etc. 

"The  same  interests  which  introduced  and  advocated 
such  legislation  supposed  to  protect  creditors  were,  for 
some  reason,  much  opposed  to  legislation  introduced  by 
the  Non-Notification  Bankers,  which  provided  that  every 
contract  (or  notice  thereof)  under  which  open  accounts 
were  assigned,  whether  upon  the  Notification  or  Non- 
Notification  Plan,  must  be  placed  on  record  the  same  as  a 
chattel  mortgage,  thereby  making  it  easy  for  creditors  to 
find  out  when  any  firm  was  assigning  its  accounts  under 
any  plan.  There  is  no  more  reason  or  need  for  legislation 
to  regulate  the  assignment  of  open  accounts  under  any 
plan  than  of  notes,  drafts,  acceptances,  warehouse  re- 
ceipts, merchandise  or  other  personal  property.  A  firm 
can  buy  any  amount  of  goods  on  open  credit,  place  same  in 
a  public  warehouse  and  borrow  money  on  the  warehouse 
receipt,  leaving  other  creditors  unsecured;  can  close  open 
accounts  into  notes  and  is  urged  to  close  them  into  ac- 
ceptances, which  can  be  sold,  discounted  or  assigned  any- 
where; can  offer  excessive  discounts  to  its  customers  for 
cash ;  and  can  sell  its  merchandise,  bought  on  open  credit, 
to  anybody  and  at  any  price. 

"Why  should  such  firms  not  also  be  at  liberty  to  sell,  dis- 
count or  assign  its  open  accounts?  If  one  operation  should 


24  THE  MODERN  CREDIT  COMPANY 

be  restricted  by  legislation,  why  not  all,  as  each  offers  op- 
portunities for  frauds  upon  creditors?" 

In  assigning  accounts  the  credit  company  usually  ad- 
vances about  eighty  per  cent  of  the  face  value  thereof  and 
holds  twenty  per  cent  reserve  against  each  account,  which 
is  refunded  the  assignor  when  the  account  is  paid  in  full 
by  the  customer.  Mr.  Arthur  R.  Jones,  one  of  the  pioneers 
of  the  Non-Notification  Plan,  states  that  his  reason  for 
instituting  this  practice  in  his  company  was  as  follows: 
"Early  in  the  history  of  our  business  experience  we  con- 
cluded that  it  would  not  be  safe  to  advance  the  full  face 
of  an  invoice,  because  of  the  infirmities  attached  to  an  open 
account.  At  that  time  manufacturers  and  wholesale  deal- 
ers were  making  approximately  twenty  per  cent  on  their 
turn  over.  As  a  matter  of  business  we  felt  that  we  could 
not  afford  to  put  more  money  into  an  account  than  our 
clients  had  invested.  Hence  an  eighty  per  cent  first  pay- 
ment, and  the  balance,  less  discount  and  deductions  taken 
by  the  customer,  became  the  fixed  standard." 

When  a  firm  enters  into  an  agreement  to  sell  its  accounts 
it  signs  a  very  rigid  contract  which  grants  broad  powers  to 
the  credit  company.  Some  of  the  principal  terms  of  the 
agreement  are:  (1)  that  the  assignor  permits  the  auditors 
of  the  credit  corporation  to  call  at  their  pleasure  to  inspect 
his  books  and  records;  (2)  pays  their  salaries  and  expen- 
ses of  travel;  (3)  sends  on  the  day  of  receipt  thereof  all 
original  checks,  drafts,  notes,  etc.,  received  in  payment  or 
on  account  of  any  accounts  sold  to  the  credit  company, 


THE  AGENCY  CONTRACT  25 

(4)  gives  the  latter  the  power  of  attorney  to  transact  any 
business  relating  to  the  assigned  accounts — such  as  endors- 
ing checks,  drafts,  notes,  and  other  documents  with  the 
name  of  the  assignor.1  In  addition  to  this  contract  the 
assignor  signs  the  actual  assignment  of  his  title  and  in- 
terest in  the  different  accounts.  It  is  made  out  in  tripli- 
cate, one  copy  going  to  the  trustee,  one  to  the  credit  com- 
pany, and  the  third  to  the  assignor. 

Before  a  credit  corporation  will  loan  money  to  a  concern 
on  its  assigned  accounts  it  will  carefully  investigate  its  credit 
standing.  This  is  done  by  several  methods:  (1)  The  mer- 
cantile credit  agencies  of  "The  Bradstreet  Company"  and 
"R.  G.  Dun  and  Company"  are  able  to  furnish  very  im- 
portant facts  as  to  the  financial  resources,  the  antece- 
dents, the  manner  of  meeting  trade  obligations,  and  the 
credit  standing  of  practically  any  firm  in  the  United 
States,  and  the  more  prominent  ones  in  many  other  sec- 
tions of  the  globe.  The  credit  corporation  is  usually  a 
subscriber  to  one  or  both  of  these  agencies.  (2)  Each 
credit  company  possesses  credit  files  of  its  own  which  it  is 
building  up  and  adding  to  all  the  time.  (3)  Its  depository 
banks  are  able  to  furnish  it  with  valuable  information. 
They  can  write  their  correspondent  banks  in  different 
localities  for  information  desired  about  firms  in  the  cor- 
respondents' immediate  neighborhood.  (4)  The  credit 


1  This  material  was  taken  from  the  Agency  Contracts  of  several  credit  companies. 
One  is  reproduced  in  full  in  the  Appendix. 


26  THE  MODERN  CREDIT  COMPANY 

corporation  often  has  its  own  representatives  in  the  dif- 
ferent sections  of  the  country.  They  can  investigate  local 
concerns  for  the  home  office.  (5)  Attorneys-at-law  act  in  a 
very  valuable  capacity  in  collecting  credit  information. 
(6)  Access  to  the  files  of  local  credit  associations,  which 
serve  as  a  clearing  house  for  credit  information,  is  often 
obtained  by  some  individual  associated  with  the  credit 
company.  (7)  A  questionnaire  is  employed1  which  in- 
cludes a  signed  financial  statement,  checked  up  by  one 
or  more  of  the  above  methods.  (8)  The  credit  companies' 
solicitors  obtain  valuable  credit  information  from  other 
merchants  and  interviews  with  prospective  customers. 
(9)  The  credit  company  often  has  its  own  credit  men  who 
are  employed  to  keep  it  informed  of  the  financial  standing 
of  its  clients  or  prospective  clients. 

After  a  credit  corporation  has  been  doing  business  with  a 
concern  it  exercises  a  very  close  supervision  over  it  through 
the  activities  of  its  auditors.  If  the  assignor  of  an  account 
does  not  pay  it  when  due,  an  explanation  is  asked  for  and 
the  credit  company's  auditor  examines  the  books  of  the 
assignor.  If  he  finds  that  the  assigned  account  has  really 
been  paid  the  assignor  by  the  debtor  he  at  once  reports 
this  fact  to  his  company,  which  usually  refuses  to  make 
further  loans  to  the  offending  concern.  There  is  thus  a  very 
strong  incentive  to  live  up  to  the  original  contract. 

The  question  now  naturally  presents  itself:  For  what 
reasons  does  a  firm  sell  its  accounts,  and  what  class  of 

1  See  appendix  for  reprint  of  this  form. 


WHAT  CLASSES  OF  CONCERNS  SELL  THEIR  ACCOUNTS    27 

firms  is  it  that  sell  their  accounts?  The  class  of  firms  that 
usually  sell  open  accounts  are:1 

"(1)  Those  who  have  a  profitable  business  with  an  excess 
of  energy,  ability,  and  plant  capacity  over  their  invested 
capital,  no  matter  how  large  they  are.  The  extra  profit  on 
increased  volume  quickly  covers  the  cost. 

"(2)  Those  who  have  a  profitable  business  and  look  upon 
a  Credit  Company,  in  a  way,  as  a  'Silent  Partner/  pre- 
ferring to  give  a  small  portion  of  their  profits  to  such  com- 
pany temporarily  and  continue  to  control  their  business, 
rather  than  give  a  large  profit,  extra  salaries,  etc.,  per- 
manently to  new  partners  or  stockholders. 

"  (3)  Those  who  have  a  large  part  of  their  invested  capital 
tied  up  in  real  estate,  plant,  machinery  or  other  fixed 
assets,  as  is  the  case  especially  with  many  manufacturers. 

"(4)  Those  whose  members  are  more  experienced  in  the 
practical  manufacturing  and  sales  end  of  their  business 
than  they  are  in  financing,  and  who  dislike  to  borrow  much 
money  from  banks  and  do  not  see  the  wisdom  of  carrying 
substantial  cash  balances. 

"(5)  Those  who  are  located  in  towns  with  limited  local 
banking  facilities  and  who  have  not  established  banking 
connections  in  the  larger  cities. 

"(6)  Those  who  need  'extra'  money  temporarily  for  some 
special  purpose,  or  to  carry  them  over  the  'peak'  of  their 
season. 


1  The  Sale  of  'Open  Accounts  Receivable,'  by  A.  E.  Duncan,  published  in  "The 
Bankers  Magazine,"  Volume  Cl,  November,  1920. 


28  THE  MODERN  CREDIT  COMPANY 

"(7)  Those  who  see  the  advantage  of  buying  much  cheap- 
er for  spot  cash,  or  discounting,  or  paying  their  bills 
promptly  at  maturity,  increasing  their  volume  with  but 
little  increase  of  overhead,  etc.;  and  can  see  where  they 
can  quickly  offset  the  extra  cost  of  the  service." 

In  addition  to  the  above  classes  of  firms  who  derive  bene- 
fit from  the  sale  of  their  accounts,  the  author  might 
mention: 

(8)  Those  in  a  precarious  condition,  who  face  financial 
ruin  unless  they  immediately  obtain  a  certain  amount  of 
cash. 

Evidence  clearly  points  to  the  fact  that  as  a  business 
proposition  it  pays  a  certain  class  of  firms  to  sell  their 
accounts. 

The  credit  company's  charge  is  not  excessive1  in  view 
of  the  fact  that  there  is  so  much  detail,  investigation,  and 
supervision  connected  with  certain  loans,  and  this  necessi- 
tates a  highly  trained  and  expert  staff.  Its  fees  vary  from 
one-twenty-fifth  to  one-thirtieth  of  one  per  cent  per  diem, 
plus  a  flat  rate  of  about  Five  Dollars  per  One  Thousand 
Dollars,  until  a  volume  of  approximately  One  Hundred 
Thousand  Dollars  during  twelve  successive  months  is 
transacted  with  that  firm.  Then  the  flat  rate  is  dropped. 
Some  companies  take  their  charge  in  the  form  of  a  dis- 
count. These  charges  are  often  supplemented  by  the  fee 
charged  for  bonding. 

1  Certain  of  the  credit  corporations  or  rather  combination  credit  and  finance  com- 
panics  have  materially  harmed  the  cause  of  the  commercial  banking  companies  by  ex- 
torting enormous  fees  from  customers  urgently  in  need  of  funds. 


BONDING  29 

Bonding*.  When  a  firm  assigns  its  accounts  to  a  credit 
corporation,  the  latter  assumes  a  threefold  risk,  namely 
(1)  that  invalid  or  fictitious  accounts  will  be  assigned ;  (2) 
that  the  assigned  accounts  will  not  be  collected,  and  (3) 
that  the  proceeds,  if  collected,  will  not  be  turned  over. 
The  credit  corporation  protects  itself  to  a  limited  extent 
by  requiring  the  assignor  to  take  out  a  fidelity  bond  with  a 
surety  bonding  company,  which,  under  certain  conditions, 
guarantees  that  no  wholly  fictitious  accounts  will  be 
intentionally  assigned,  and  that  the  assignor  will  not 
misappropriate  any  money  that  may  be  actually  collected. 

This,  of  course,  does  not  insure  against  number  (2) 
occurring;  as  this  would  be  credit  insurance  of  the  most 
advanced  degree.  It  would  be  guaranteeing  that  an  in- 
dividual would  pay  his  bills. 

Instead  of  the  above  manner  of  insuring,  many  of  the 
credit  companies  have  their  customers  take  out  a  type  of 
fidelity  bond  which  is  known  as  a  moral  effect  bond.3 

The  Installment  Business.  The  role  that  the  credit  com- 
pany2 plays  in  the  financing  of  the  sale  of  goods  on  the  in- 
stallment plan  must  next  be  considered.  It  has  already 
been  mentioned  earlier  how  there  flourished  in  the  larger 


1  See  "The  Principles  of  Surety  Underwriting,"  by  Luther  E.  Mackall. 

2  This  type  of  credit  company  is  often  called  auto-finance  company,  automobile 
bank,  or  acceptance  company,  which  last  term  is  employed  by  the  author  synonymously 
with  "credit  corporation." 

3  For  further  information  concerning  the   "moral  effect"   bond  address    the 
author. 


30  THE  MODERN  CREDIT  COMPANY 

industrial  cities  a  certain  class  of  commission  houses  or 
factors  which  supplied  the  needs  of  those  engaged  in 
certain  lines  such  as  the  textile,  leather,  and  tobacco  in- 
dustries. Likewise  credit  companies  have  been  formed 
to  meet  the  needs  of  certain  trades. 

A  brief  survey  of  the  financing  of  the  distribution  of 
automobiles  and  of  the  installment  furniture  business  fol- 
lows. The  automobile  trade  is  discussed  because  its  finan- 
cing plays  a  particularly  large  role  in  the  activities  of  the 
credit  companies;  and  the  installment  furniture  business 
is  treated  of  because  it  is  more  or  less  typical  of  the  type  of 
financing  performed  for  various  articles  sold  on  the  install- 
ment plan. l 

The  question  that  at  once  presents  itself  is:  "How  has  the 
acceptance  company  come  to  play  such  an  important  part 
in  the  automobile  business?"  The  reason  for  the  develop- 
ment of  the  automobile-finance  company  can  be  directly 
traced  to  the  distribution  end  of  the  business.  "The 
automobile,  despite  the  current  assertions  that  it  is  a 
necessity,  has  always  been  looked  upon  by  the  commercial 
bankers  as  in  a  different  class  from  staple  products,  as  in- 
volving relatively  large  risks."2  The  dealers  themselves 
usually  have  small  resources  for  the  volume  of  business 
they  perform.  They  buy  mostly  on  credit,  and  sell  mostly 

1  See  article  of  H.  G.  Moulton  on  "Commercial  Credit  or  Discount  Companies, 
page  833,  Journal  of  Political  Economy,  Volume  28,  1920.  The  author  wishes  to  ac- 
knowledge the  use  of  this  material. 
2  Ibid. 


AUTOMOBILE  FINANCING  31 

on  credit.  A  great  percentage  of  the  automobiles  sold  are 
used  for  pleasure  purposes.  They  are  also  subject  to  a 
rapid  depreciation.  In  hard  times  it  is  very  difficult  to 
dispose  of  the  second-hand  car.  In  view  of  these  circum- 
stances the  banks,  in  times  of  rapid  expansion,  have  been 
very  loath  to  extend  credit  to  the  automobile  dealer  for 
the  distribution  of  his  cars.  It  is  this  gap  which  the  credit 
company  fills.  It  makes  loans  to  the  dealer,  for  which  it 
requires  proper  security.  This  security  or  collateral  it 
hypothecates  with  a  trustee,  and  against  it  issues  its  own 
secured  debentures,  which  it  sells  to  the  banks.  The  banks 
then  really  extend  an  indirect  credit  to  the  automobile 
dealer,  indorsed  by  the  credit  corporation. 

Automobile  financing  divides  itself  into  two  types: 

(1)  Financing  the  dealer  in  his  transactions  with  the 
manufacturer,  known  as  the  "Wholesale  Plan."1 

(2)  Financing  the  dealer  in  his  transactions  with  in- 
dividuals, known  as  the  "Retail  Plan." 

Under  (1)  advances  are  made  up  to  about  eighty-five 
per  cent  of  the  dealer's  cost  price  of  the  machines,  which 
are  stored  in  warehouses  or  on  the  floor  of  the  dealer's 
show  rooms.  A  lien  is  retained  on  the  cars,  and  in  addition 
the  dealer's  promissory  note  is  required.  Often  the  manu- 
facturer endorses  the  note  or  agrees  to  repurchase  the  cars. 
The  machines  are  insured  against  fire,  theft  and  conver- 

1  Otherwise  known  as  "The  Floor  Plan." 


32  THE  MODERN    CREDIT  COMPANY 

sion.    The  average  length  of  these  loans  is  from  two  to 
three  months. l 

Under  (2)  the  finance  company  buys  retail  time  sales 
lien  notes,  upon  which  the  purchaser  has  paid  one-fourth 
or  more  cash,  the  balance  being  due  monthly,  and  pays 
therefor  one  hundred  per  cent  of  such  notes,  less  its 
charges.2  It  requires  the  indorsement,  guarantee,  or 
promise  of  the  dealer  to  repurchase  the  car.  A  lien  is 
also  retained  on  the  cars,  which  are  insured  against  fire, 
theft  and  conversion  by  the  purchaser,  and,  in  some  cases, 
collision.  The  average  length  of  these  loans  is  from  eight 
to  twelve  months. 

The  procedure  described  under  (1)  and  (2)  may  vary 
slightly  with  different  companies  and  in  different  states, 
but  the  underlying  idea  is  approximately  the  same.3  In 
some  states  chattel  mortgages  are  taken  on  the  cars;  in 
others  a  conditional  sale  agreement  or  a  lease  with  privi- 


1  See  page  825,  Journal  of  Political  Economy,  Volume  28,  1920. 

2  When  these  notes  are  deposited  with  the  trustee  for  the  issuance  of  collateral 
trust  notes  against  them,  they  are  usually  regarded  as  a  better  grade  of  collateral  than 
assigned  accounts,  and  collateral  trust  notes  are  issued  against  them  to  a  greater  ratio 
than  against  the  assigned  accounts. 

3  It  is  interesting  to  note  the  existence  of  the  Auto-Financing  Credit  Men's  As- 
sociation, Inc.,  with  its  main  office  in  New  York  and  branch  offices  in  Pittsburgh,  Chi- 
cago and  Indianapolis,  and  a  membership  of  forty-five  automobile  finance  companies. 
The  members  of  the  Association  file  daily  with  the  Clearance  Bureau  by  card  the  makes 
and  serial  numbers  of  all  cars  financed  both  on  the  floor  and  retail  plans.     These  cards 
are  filed  alphabetically  according  to  makes,  and  serially  according  to  numbers:  and  are 
then  checked  against  cards  previously  filed  for  possible  duplications,  which  when  dis- 
covered are  immediately  reported  to  the  member  companies  interested. 

A  system  for  the  prevention  of  over-extension  of  credit  to  dealers  has  also  been 
inaugurated,  under  which  the  members  file  with  the  Bureau  the  na  mes  and  i  ddn fus 
of  all  active  accounts.  When  two  or  more  companies  are  found  to  be  doing  business 
with  the  same  dealer  they  are  notified.  A  further  service  is  afforded  to  the  mem- 
bers in  the  listing  of  dealers  and  purchasers,  who  from  experience  are  known  to  be  un- 
satisfactory credit  risks.  The  Association  also  endeavors  to  foster  and  advocate  legis- 
lation beneficial  to  the  automobile  industry. 


INSURANCE  33 

lege  to  repurchase  is  used,  while  in  others  a  trust  receipt1 
is  employed.  The  charges  for  the  above  operations  are 
usually  in  the  form  of  a  gross  service  charge  which  amounts 
to  about  twelve  to  fifteen  per  cent  per  annum.2  The  in- 
surance may  be  included  in  this  or  it  may  constitute  an 
additional  charge. 

Insurance.  The  credit  company  usually  protects  itself, 
whenever  possible,  by  different  forms  of  insurance.  When 
loans  are  made  with  personal  property  pledged  as  security, 
the  acceptance  corporation  requires  its  customers  to  insure 
at  least  against  fire  and  theft,  and  sometimes  even  further 
protects  itself.  In  the  case  of  automobiles,  insurance  is 
required  against  fire,  theft,  and  sometimes  against  colli- 
sion. The  credit  company  requires  its  clients  to  place  this 
insurance  with  whomever  it  designates.  It  usually  makes 
a  commission,  itself,  on  the  insurance,  in  one  of  several 
ways: 

(1)  It  will  agree  with  a  certain  insurance  company  or  its 
agent  to  place  with  it  all  of  its  insurance  during  the  year; 
and  be  allowed  a  commission  or  a  reduced  rate  on  this 
amount.    The  customer  of  the  acceptance  company  pays 
the  full  rate. 

(2)  A  credit  corporation  will  often  act  as  agent  for  an 
insurance  company,  thus  receiving  the  agent's  full  commis- 
sion. 

1  Under  "Wholesale  Plan." 

2  That  is,  the  gross  charge  amounts  to  that.    It  will  be  seen  that  the  credit  cor- 
poration receives  interest  for  the  total  advance  over  the  whole  length  of  the  loan.     But 
as  the  notes  are  usually  paid  off  monthly  the  credit  corporation  has  the  use  of  part  of  its 
money.     This  makes  the  charge  much  greater. 


34  THE  MODERN  CREDIT  COMPANY 

(3)  The  credit  corporation  will  make  arrangements 
with  an  insurance  company  or  its  agent  to  obtain  a  com- 
mission on  all  policies  it  is  instrumental  in  having  placed 
through  it.  This  differs  from  (1)  in  that  the  credit  com- 
pany does  not  agree  to  place  all  of  its  insurance,  and 
thus  the  commission  is  smaller. 

We  will  now  consider  the  activities  of  the  credit  com- 
panies in  relation  to  the  retail  furniture  business.  In  the 
United  States  there  is  at  least  one  credit  company  devoted 
solely  to  the  financing  of  the  furniture  installment  busi- 
ness, and  many  others  that  engage  in  it  to  a  limited  extent. 
Approximately  eighty-five  per  cent1  of  the  furniture  pur- 
chased by  the  public  in  this  country  is  sold  on  time.  The 
furniture  dealer  usually  takes  a  chattel  mortgage  or  con- 
ditional sale  of  contract  on  these  goods.2  He  requires,  in 
most  instances,  an  initial  payment  with  the  promise  to 
pay  the  remaining  installments  monthly  over  a  six  to 
twenty-four  months  period.  These  contracts  of  condi- 
tional sale  are  then  assigned  to  the  credit  company,  which 
usually  advances  from  fifty  to  eighty  per  cent  on  their  face 
value.  The  credit  corporation  requires  the  indorsement, 
guarantee  or  agreement  of  the  dealer  to  repurchase  the 
contracts.  The  margin  of  profit  is  rather  large  in  the  fur- 
niture installment  business,  so  the  dealer  can  easily  afford 

1  From  statistics  compiled  by  The  Grand  Rapids  Furniture  Record,  Grand  Rapids. 
Michigan. 

2  Selling  on  Conditional  Sale  of  Contracts  has  been  so  general  that  the  Commis- 
sioners on  Uniform  State  Laws  have  adopted  a  uniform  act  relating  to  Conditional 
Sales.      This  is  being  sponsored  by  members  of  the  National  Association  of  Credit 
Men.     It  has  been  adopted  by  at  least  seven  states.     For  further  information  com- 
municate with  the  Uniform  Sales  Service  Company,  1133  Broadway,  New  York. 


FURNITURE  AND  OTHER  ARTICLES  35 

to  pay  the  credit  company's  charge  which  is  indeed  small 
when  compared  with  the  retailer's  profit. 

The  president  of  the  credit  company  devoted  solely  to 
the  financing  of  the  retail  furniture  dealer  told  the  author 
that  he  has  found  it  unnecessary  to  demand  that  the  fur- 
niture be  insured,  as  the  individual  accounts  are  so  small 
and  the  risks  so  diversified  that  the  possibilities  for  losses 
are  minimized,  and  it  pays  the  furniture  dealer  to  carry  his 
own  insurance.  What  has  been  said  above  about  the  fin- 
ancing of  the  installment  furniture  business  applies  with 
slight  modification  to  the  financing  of  numerous  other  ar- 
ticles, such  as  pianos, l  pianolas,  gas  and  electric  appliances, 
etc.  Other  commodities,  such  as  trucks  and  tractors,  are 
financed  in  a  manner  somewhat  similar  to  the  automobile. 
Credit  companies,  also,  often  make  loans  ranging  from 
forty  to  eighty  per  cent  of  the  cost  price  on  the  warehouse 
receipts  of  any  staple  commodity. 

During  the  recent  fall  in  prices  of  nearly  all  articles, 
credit  corporations  have  been  forced  to  exercise  great  dis- 
cretion in  their  loans.  In  certain  lines  of  industry  such  as 
the  fur,  silk,  woolen,  cotton,  shoe,  shipbuilding,  automobile 
and  kindred  trades  there  has  been  a  tremendous  number 
of  failures.  Credit  companies  and  banks  alike  have  had  to 
cope  with  unusual  maladjustments  in  trade  and  industry. 

1  The  terms  of  credit  for  pianos  and  pianolas,  in  some  cases,  are  as  long  as  five  years. 


CHAPTER  IV 

THE  ASSIGNED  ACCOUNT  AND  THE 
TRADE  ACCEPTANCE 

As  the  trade  acceptance  and  the  assignment  of  open 
book  accounts  are  each  employed  to  convert  a  non-liquid 
asset  into  cash,  the  author  feels  that  in  a  work  devoted  to 
the  treatment  of  the  latter,  the  relative  merits  and  de- 
merits of  the  two  should  be  discussed  and  analyzed.  A 
short  explanation  of  the  trade  acceptance  is  first  given. 
Then  an  attempt  is  made  to  show  the  advantages  and  dis- 
advantages of  the  two  different  methods. 

The  use  of  the  trade  acceptance,  in  the  form  of  bills  of 
exchange,  for  payment  of  goods  is  almost  as  old  as  com- 
merce itself.  It  is  even  maintained  by  some  writers  that 
the  latter  were  used  by  the  Assyrians  as  early  as  the  seventh 
century  B.  C.1  Macleod  ascribes  their  origin  to  the  Ro- 

1  See  Nys,  "Economic  Researches."     He  quotes  Francois  Lenormant  on  the  As- 
syrian inscriptions. 


DESCRIPTION  OF  THE  TRADE  ACCEPTANCE     37 

mans1;  and  Montesquieu  speaks  of  their  early  use  by  the 
Jews.2 

Prior  to  the  Civil  War  the  trade  acceptance  was  em- 
ployed in  certain  sections  of  our  own  country.3  The  usual 
rerm  of  credit  on  merchandise  transactions,  however,  was 
about  four  months  in  the  East  and  from^six  to  eight  months 
in  the  West,  with  the  buyer  giving  his  promissory  note. « 
During  the  War  and  up  to  the  crash  of  1873  most  trans- 
actions were  for  cash.5  This  was  probably  due  to  the  in- 
stability of  the  times,  the  lack  of  confidence  in  the  pre- 
vailing media  of  exchange  and  the  great  abundance  of 
notes  (greenbacks)  in  circulation.6 

Since  the  crisis  of  1873  there  has  developed  the  granting 
of  credit  on  the  open  account.  The  great  growth  of  banks 
and  the  increase  of  capital  have  undoubtedly  helped  this 
movement.  Also  each  manufacturer  and  wholesaler  vied 
with  his  competitors  in  extending  easy  terms  to  his  cus- 
tomers.7 Due  to  the  risk  and  uncertainty  attending  long 
credits  discounts  for  cash  were  offered  in  order  to  insure 
prompt  payments;  and  gradually  the  open  book  account 
system  was  evolved.8  On  account  of  the  great  develop- 
ment and  improvement  in  all  forms  of  transportation  and 

1  See  Macleod's  "History  of  Banking." 

2  See  Montesquieu's  "Esprit  des  Lois,"  Book  XXI,  Chapter  XX,  Vol.  IV  of  Oeu- 
vres  Completes.     Edition  Edouard  Laboulaye,  Paris,  1877. 

3  Jos.  J.  Kelin's  "Development  of  Mercantile   Instruments  of  Credit,"  Journal 
of  Accountancy,  Vol.  12,  p.  333. 

4  Ibid,  Vol.  13,  p.  45. 

5  Ibid,  Vol.  12,  p.  527-528. 

6  American  Acceptance  Council  Literature  and  Park  Mathewson's  "Acceptances, 
Trade  and  Bankers'". 

7  See  American  Trade  Acceptance  Leaflet  "Why  Accept?" 

8  "Trade  Acceptances,  What  They  Are  and  How  They  Are  Used,"  by  Robert  H. 
Treman,  formerly  Deputy  Governor,  Federal  Reserve  Bank,  N.  Y. 


38  THE  MODERN  CREDIT  COMPANY 

communication  the  terms  of  credit  have  steadily  tended 
to  become  shorter.1  The  prevailing  custom  has  been  to 
extend  credit  on  open  accounts  with  from  30  to  90  days  in 
which  to  pay,  and  with  a  discount  allowable  for  cash  with- 
in from  10  to  30  days,  the  exact  figures  varying  in  different 
trades  and  with  different  merchants. 

In  order  to  release  this  money  tied  up  in  open  book  ac- 
counts and  to  promote  a  healthier  credit  condition  the 
Federal  Reserve  Board  has  sought  to  reintroduce  the 
"Trade  Acceptance,"  widespread  use  of  which  was  not 
possible  under  the  old  National  Bank  Act.  One  naturally 
asks  what  this  resuscitated  type  of  commercial  paper  is. 
"A  trade  acceptance  is  a  draft  drawn  by  the  seller  on  the 
buyer,  having  a  definite  maturity,  and  payable  in  dollars 
in  the  United  States  without  qualifications,  and  signed  by 
the  buyer  across  the  face  acknowledging  a  debt  for  value." 
This  "double  name"  paper  has  been  christened  a  "Trade 
Acceptance"  by  the  Federal  Reserve  Board.  It  is  em- 
ployed only  in  business  dealings  that  effect  the  sale  and 
purchase  of  goods.  In  order  to  be  eligible  for  rediscount 
by  the  Federal  Reserve  Banks  it  must  arise  out  of  a  cur- 
rent merchandise  transaction.  It  cannot  be  given  for  bor- 
rowed money  or  overdue  accounts,2  nor  for  commissions 
of  any  kind,  sales  of  bonds  or  stocks,  professional  services, 


1.  See  Prendergast,  "Credit  and  Its  Uses." 

2.  Bankers,  however,  cannot  tell  when  an  account  is  overdue,  if  an  individual  wishes 
to  practice  deception. 


THE  TRADE  ACCEPTANCE  39 

or  any  debts  not  incurred  through  the  purchase  of  goods 
from  the  drawer. 

The  trade  acceptance  is  employed  to  a  great  extent  in 
Canada1  and  Europe.  When  a  merchant  ships  commo- 
dities to  a  buyer  he  sends  an  invoice  of  goods  with  trade 
acceptance  attached,  drawing  on  the  buyer  for  a  definite 
sum,  payable  at  a  definite  maturity.  The  buyer  writes 
his  name,  the  place  where  he  wishes  to  make  payment,  and 
the  word  "Accepted"  across  the  face  of  the  draft  and  re- 
turns it  to  the  seller.  The  latter  can  take  this  to  his  banker 
and  have  it  discounted,  and  thus  not  have  to  wait  for  his 
money  until  the  maturity  of  the  acceptance. 

In  the  United  States  the  practice  is  to  ship  goods  to  a 
customer  and  quote  him  a  discount  for  cash  within  so 
many  days,  and  net  thirty,  sixty  or  ninety  days.  If  pay- 
ment is  not  made  then  the  seller  decides  what  action  he 
wishes  to  take.  He  can  extend  more  time  or  refuse  to 
make  further  shipment  of  goods  until  his  old  accounts  are 
paid.  And  during  this  period  he  is  acting  as  banker  for  his 
customers.  It  was  hoped  that  the  Federal  Reserve  Act 
creating  the  favored  "Trade  Acceptance"  would  induce 
bankers  and  business  men  to  take  advantage  of  this  means 
of  payment  and  so  release  billions  of  dollars  of  "frozen 
credits,"  and  allow  a  greater  volume  of  business  to  be  done 
on  the  same  amount  of  invested  capital. 

1.  See  Park  Mathewson's  "Acceptances,  Trade  and  Bankers'." 


40  THE  MODERN  CREDIT  COMPANY 

The  theory1  of  the  acceptance  payment  is  that  the 
member  bank  discounts  the  trade  acceptance  for  the  mer- 
chant, and  obtains  its  money  wherewith  to  do  this  by  re- 
discounting  it  with  the  Central  Federal  Reserve  Bank  of 
its  district.2  When  the  acceptance  is  paid  by  the  acceptor 
to  the  bank,  it  can  employ  this  money3  to  pay  back  the 
Federal  Reserve  Bank  the  amount  borrowed  from  it.  Thus 
all  credit  transactions  of  this  character,  under  normal  con- 
ditions, would  completely  liquidate  themselves.  It  must 
be  understood  that  in  actual  practice  the  merchant  often 
does  not  discount  the  acceptance,  and  when  he  does,  the 
member  bank  in  turn  often  does  not  rediscount  it. 

The  Central  Federal  Reserve  Banks  in  the  past  have 
given  the  member  banks  a  preferential  rate  in  rediscount- 
ing  the  trade  acceptance,  with  the  expectation  that  they 
would  pass  this  on  to  their  customers,  thus  serving  as  an 
incentive  for  them  to  adopt  the  "acceptance  idea."  Un- 
fortunately the  member  banks  have  not  always  passed 
this  preferential  rate  on  to  the  business  man. 

The  Assigned  Account  and  the  Trade  Acceptance. 
What  is  the  difference  between  selling  an  open  account 
to  a  credit  company  and  selling  a  trade  acceptance  to  a 
bank? 

1.  That  is,  the  theory  of  the  acceptance  as  regards  discounting  and  rediscounting; 
as  with  other  eligible  paper. 

2.  Resorted  to  more  in  times  of  money  stringency. 

2.  Actual  currency  rarely  employed;  performed  by  means  of  credit. 


COMPARISON  OF  THE  TWO  METHODS  41 

Discounting  an  acceptance  is  a  much  cheaper  method 
than  selling  an  account.  The  former  can  be  done  for  about 
six  per  cent  and  the  latter  costs  about  eighteen  per  cent 
per  annum.  The  banker  might  take  this  into  considera- 
tion in  his  single-name  line  of  credit,  and  curtail  to  a 
greater  degree  the  loans  of  the  firm  which  sells  its  accounts, 
as  this  is  the  more  expensive  and  less  desirable  method. 

Let  us  examine  the  effect  of  the  two  on  the  credit  struc- 
ture of  the  country.  A.,  a  merchant,  has  a  customer,  B. 
He  obtains  a  trade  acceptance  for  goods  shipped  to  B.  to 
the  extent  of,  say  $1,000.00.  A.  discounts  the  acceptance 
with  his  banker,  who  in  turn  can  rediscount  it  with  the 
Central  Federal  Reserve  Bank  of  his  district  and  receive 
credit  to  the  extent  of  $1,000.00  less  the  discount  rate, 
which  may  be  anywhere  from  four  per  cent  to  seven  per 
cent.  The  banker  now  can  have  this  money  ready  to  ac- 
commodate on  some  other  loan.  In  other  words  the  ac- 
ceptance can  create  the  currency  which  is  needed  to  fin- 
ance itself. 

Let  us  see  what  would  have  happened  if  A.  had  sold  his 
$1,000.00  account  owed  him  by  B.  to  a  credit  company. 
He  would  have  obtained  eighty  per  cent  of  the  face  value 
of  the  account,  less  the  discount  charged  by  the  credit  cor- 
poration, and  had  this  money  with  which  to  do  as  he 
deemed  for  the  best  interests  of  his  business.  The  differ- 
ence so  far  in  the  two  methods  is,  A.  pays  more  under  the 
latter  method  and  receives  much  less  cash.  But  let  us 


42  THE  MODERN  CREDIT  COMPANY 

follow  the  matter  further  and  see  what  is  the  result.  The 
credit  company  takes  this  assigned  account  in  conjunction 
with  many  others  and  deposits  them  with  a  trustee,  and 
then  issues  its  own  trust  notes  with  this  collateral  as  se- 
curity. These  are  sold  to  banks  and  individuals.  With  the 
money  received  from  their  sale  it  buys  more  accounts  or 
makes  more  loans,  and  then  issues  more  collateral  trust 
notes  against  this  additional  collateral. 

These  notes,  unlike  the  trade  acceptance,  are  not  eli- 
gible for  rediscount  with  the  Federal  Reserve  Bank.  On 
each  turn-over  of  invested  capital  they  are  scaled  down 
twenty  per  cent,  while  the  acceptance  is  rediscounted  for 
one  hundred  per  cent.1  The  acceptance  also  serves  as  a 
secondary  reserve  for  the  member  banks  when  rediscount- 
ed with  the  Central  Bank.  It  appears  then  that  greater 
expansion  is  possible  with  the  acceptance  than  with  the 
assigned  accounts.  However,  as  all  the  former  must  pass 
through  the  hands  of  the  banker  it  is  possible  for  him  to  ex- 
ercise a  wise  supervision  on  undue  expansion.2 

Summary.  The  trade  acceptance  is  cheaper  than  the 
assigned  account.  It  can  be  discounted  for  one  hundred 
per  cent  instead  of  eighty  per  cent  and  thus  supplies  more 
money  to  the  borrower.  It  is  more  attractive  to  the  banker 
as  it  is  eligible  for  rediscount,  and  counts  as  a  secondary 


1.  Of  course  the  acceptance  may  not  be  turned  over  more  than  once,  or  at  all  for 
that  matter. 

2.  The  banker  claims  that  the  credit  companies  are  interested  only  in  the  safety 
of  their  loans  and  the  resulting  profits.     This  criticism  is  unfortunately  only  too  true, 
in  some  cases.     However,  it  would  apply  equally  well  to  many  banks. 


WHY  THE  TRADE  ACCEPTANCE  HAS  GROWN  SO  SLOWLY   43 

reserve,  and  in  addition  allows  him  an  oversight  of  the 
merchant's  business.  It  looks  as  if  the  trade  acceptance  is 
a  more  ideal  form  of  closing  an  open  account  than  selling  it 
to  a  credit  corporation.  Why  has  the  acceptance  then  not 
come  into  general  use?1  There  are  several  reasons: 

1.  The  Trade  Acceptance  is  a  radical  departure  from  the 
open  book  account  system  which  has  been  in  vogue  for 
the  last  fifty  years. 

2.  The  buyer  at  the  bottom  of  the  pyramid  does  not  give 
acceptances,  and  this  is  bound  to  react  upon  the  differ- 
ent strata  of  the  pyramid. 

3.  The  acceptance  does  not  satisfy  the  requirements  of 
certain  trades. 

4.  The  vast  size  of  our  country  presents  a  serious  ob- 
stacle. 

5.  The  United  States  Treasury  Certificates  of  Indebted- 
ness offered  on  the  market  have  absorbed  huge  sums 
that  would  have  been  available  for  acceptances,  and 
on  account  of  this  the  acceptance  movement  has  been 
somewhat  retarded.2 

6.  The  present  Call  Money  System. 2 

7.  The  abuse  of  the  acceptance  by  unscrupulous  indi- 


1.  Total  volume  of  trade  acceptances  discounted  for  member  banks,  and  bought 
in  the  open  market  by  the  twelve  Federal  Reserve  Banks,  taken  from  the  seventh 
annual  report  of  the  Federal  Reserve  Board: 

1918  1919  1920 

Discounted  for  member  banks 187,373,000         138,420,000         192,157,000 

Bought  in  the  open  market 61,036,000          36,558,000          74,622,000 

Total 248,409,000         174,978,000         266,779,000 

2.  See  "Problems  and  Progress  with  Dollar  Acceptances"  by  Jerome  Thralls,  pub- 
lished by  the  American  Acceptances  Council. 


44  THE  MODERN  CREDIT  COMPANY 

dividuals  has  robbed  certain  bankers  of  their  whole- 
hearted support  of  the  idea.1 
Let  us  first  consider  (1). 

(1)  Since  the  Civil  War  business  has  been  done  on  the 
open  account  plan  in  the  United  States.  To  introduce  an 
entirely  new  system  is  an  herculean  task  in  itself.  Im- 
mediately everyone  has  to  be  convinced  that  the  new 
system  is  superior  to  the  old.  The  selling  of  open  ac- 
counts on  the  other  hand  does  not  require  the  merchant  to 
spread  propaganda.  It  is  merely  a  private  agreement  be- 
tween him  and  the  credit  company.  In  addition  there  are 
many  other  objections  to  the  acceptance  such  as  the 
following: 

(a)  A  certain  class  is  entirely  satisfied  with  the  present 

system. 

(b)  Bankers  complain  of  increased  paper  work. 

(c)  Buyers  that  they  do  not  benefit  by  it. 

(d)  That  it  ties  them  down  to  a  definite  day  of  payment. 

(e)  There  are  many  other  objections  some  of  which  do 

not  rest  upon  a  solid  ground,  but  can  only  be  over- 
come by  an  aggressive  "missionary"  campaign 
which  the  average  business  man  and  banker  have 
shown  themselves  unwilling  or  unable  to  under- 
take. The  former  often  says  it  is  the  banker's 

1.  See  "Problems  and  Progress  with  Dollar  Acceptances,"  by  Jerome  Thralls,  pub- 
lished by  the  American  Acceptance  Council. 


DISADVANTAGES  OF  THE  TRADE  ACCEPTANCE          45 

place  to  "push  the  idea";  the  latter  says  it  is  the 
business  man's. 

(2)  It  is  a  mere  platitude  to  state  that  the  retailer  is 
forced  to  give  credit  to  the  ultimate  consumer.  This  being 
the  case  it  is  asking  a  good  deal  of  the  retailer  to  accept 
for  the  jobber  or  manufacturer.  In  France  the  retailer 
has  been  very  successful  in  obtaining  what  practically 
amounts  to  an  acceptance  from  his  "charge  account"  cus- 
tomers. l  When  they  make  a  purchase  of  goods  and  do  not 
pay  cash  for  them  they  are  asked  to  sign  a  slip  which,  in 
reality,  amounts  to  a  trade  acceptance.  These  slips  can 
be  borrowed  upon  at  the  bank2. 

Following  is  a  quotation  which  shows  the  attitude  taken 
by  certain  members  at  a  recent  semi-annual  conference  of 
a  big  retailers'  association. 

"On  the  conclusion  of  Mr.  W's  address,  Mr.  S.  opposed 
the  use  of  trade  acceptances  by  manufacturers  and  whole- 
salers in  their  dealings  with  retailers.  He  emphasized  the 
fact  that  an  acceptance  amounted  to  the  same  thing  as  a 
note,  the  retailer  being  bound  thereto.  The  trade  accep- 
tance, Mr.  S.  said,  was  a  fine  thing  for  the  banker  and  for 
the  wholesaler,  but  he  did  not  see  how  it  could  be  made 
of  any  real  advantage  to  the  retailer.3" 

1.  Of  $3,000,000,000  worth  of  acceptances  discounted  in  one  year   under    pre- 
war conditions  by  the  Bank  of  France,  the  average  was  only  about  $100  and  some  ac- 
ceptances were  as  low  as  $1.00,  there  being  more  than  $500,000,000  discounted  in 
amounts  less  than  $25.00.     It  is  well  to  note,  however,  that  many  of  these  so-called 
acceptances  are  really  drafts. 

2.  The  ultimate  consumer,  however,  does  not  expect  to  resell  the  goods  he  pur- 
chases, and  in  the  United  States  we  should  not  call  a  draft  drawn  by  the  retail  dealer 
upon  the  ultimate  consumer  a  true  trade  acceptance. 

3.  It  is  interesting  to  note  in  this  respect  that  certain  credit  companies  do  not  in- 
cline to  purchasing  the  accounts    of  retailers,  some  even  going  so  far  as  to  refuse  their 
accounts. 


46  THE  MODERN  CREDIT  COMPANY 

(3)  The  acceptance  does  not  meet  the  requirements  of 
certain  trades.  This  can  perhaps  best  be  explained  by  the 
following  resolution  which  received  the  unanimous  in- 
dorsement of  the  executive  committee  of  the  National 
Grocers'  Association  at  a  meeting  held  in  Washington, 
February,  1918: 

"Whereas,  We  appreciate  the  advantages  of  the  trade 
acceptance  in  certain  lines  of  buiness  and  its  general  de- 
sirability from  a  banking  standpoint;  and 

"Whereas,  The  wholesale  grocery  business  has  ad- 
vanced to  the  point  where  it  is  conducted  on  a  short  term 
basis;  and 

"Whereas,  The  adoption  of  the  trade  acceptance  in  the 
grocery  trade  would  have  a  tendency  to  lengthen  terms 
and  increase  credit  risks,  therefore  be  it 

"Resolved,  By  the  Executive  Committee  of  the  Na- 
tional Wholesale  Grocers'  Association  of  the  United 
States,  that  the  general  adoption  of  the  trade  acceptance 
in  the  grocery  trade,  under  prevailing  grocery-trade  con- 
ditions, would  really  be  a  step  backward." 

(5),  (6)  and  (7)  As  these  last  three  reasons  have  no 
direct  bearing  upon  the  assigned  account  a  discussion  of 
them  is  deemed  out  of  place.1 


1.  For  this  see  "Problems  and  Progress  with  Dollar  Acceptances"  by  Jerome 
Thralls. 


CHAPTER  V 
ANALYSIS  OF  THE  PROBLEM 

The  types  of  financing  performed  by  the  credit  company 
have  already  been  explained  at  great  length.  It  now  re- 
mains to  be  considered  whether  its  activities  can  be  justi- 
fied. That  is,  are  sound  business  methods  being  fostered 
by  the  credit  corporation;  and  just  what  effect  do  these 
types  of  financing  exert  upon  the  general  credit  structure? 
A  discussion  of  these  problems  divides  itself  into  two 
heads:  (A)  Is  the  selling  of  open  book  accounts  a  wise  or 
unwise  practice  in  its  relation  to  the  effect  it  exerts  upon 
the  credit  system  of  the  country?  (B)  Is  the  financing  of 
the  sale  of  articles  on  the  installment  plan  a  wise  or  unwise 
practice  in  relation  to  the  effect  it  exerts  upon  the  credit 
system  of  the  country? 

(A)  There  can  be  no  doubt  as  to  the  general  advisa- 
bility of  the  selling  of  open  book  accounts  in  certain  cases : 
(1)  There  are  many  firms  which  have  a  profitable  business 

47 


48  THE  MODERN  CREDIT  COMPANY 

with  an  excess  of  energy,  ability  and  plant  capacity  over 
their  invested  capital.  The  banks  will  not  fully  accom- 
modate them.  The  credit  companies  have  served  this  type 
of  firms  to  great  advantage,  and  many  small  business  en- 
terprises have  grown  to  large  proportions  through  the  em- 
ployment of  their  services.  It  is  difficult  to  see  where  a 
reasonable  accommodation  of  this  class  of  concerns  can 
produce  a  strain  on,  or  an  unwise  expansion  of,  our  credit 
system. 

(2)  There  are  those  firms  which  employ  the  commercial 
banking  company  as  a  "Silent  Partner."   A  business  con- 
cern often  needs  more  capital  temporarily,  and  is  willing 
to  share  its  profits  for  the  use  of  it.  The  credit  corporation 
furnishes  money  at  very  short  notice  at  a  fixed  percentage 
and  the  borrower  can  expand  and  contract  his  "line"  al- 
most at  will,  a  procedure  which  could  not  be  easily  ef- 
fected if  an  individual  were  acting  as  a  partner.    With 
proper  supervision  there  is  very  little  danger  of  unwise 
business  expansion. 

(3)  Many  business  concerns  have  a  large  percentage  of 
their  assets  tied  up  in  plant,  equipment,  machinery,  etc. 
Bankers  often  advise  them  to  place  a  mortgage  on  their 
plant  and  to  employ  the  proceeds  in  the  regular  conduct 
of  their  business.  For  various  reasons  it  may  be  impossible 
to  effect  this  advantageously. 

The  usual  practice  with  banks  is  to  loan  about  50  per 
cent  on  the  accounts  receivable,  provided  other  items  in 
the  financial  statement  of  the  borrower  are  satisfactory. 
If  a  large  percentage  of  a  firm's  capital  is  in  fixed  assets, 


THE  GAP  IN  CREDITS  FILLED  BY  THE  CREDIT  COMPANY  49 

it  might  be  considerably  restricted  in  its  activities  by  only 
being  able  to  borrow  this  amount  from  its  bank.  Recourse 
is  had  to  the  credit  company.  It  will  loan  eighty  per  cent 
on  the  face  value  of  the  borrower's  book  accounts.  He 
will  then  have  thirty  per  cent  more  working  capital  than 
if  he  had  borrowed  from  the  bank.  If  the  increased  profit 
from  this  additional  capital  more  than  offsets  the  differ- 
ence between  the  bank's  and  the  credit  corporation's 
charges  the  borrower  benefits  more  by  utilizing  the  latter. 

(4)  There  is  that  class  of  firms  which  have  inadequate 
banking  facilities  in  their  own  neighborhood. l  Accommo- 
dating a  concern  in  its  legitimate  financing  merely  because 
its  local  bank  is  too  small  to  provide  adequately  for  it,  is 
certainly  not  putting  an  unnecessary  strain  upon  the 
credit  structure. 

(5)  There  are  those  firms  which  seek  accommodation 
from  the  credit  company  at  the  "peak"  of  their  season. 
In  this  case  there  is  danger  of  overextension  unless  a  very 
wise  supervision  is  maintained. 

(6)  There  is  that  class  of  firms  which  by  borrowing  from 
a  credit  company  can  discount  its  bills  and  buy  at  a  low 
rate  for  spot  cash.  The  credit  companies'  charges  are  often 
less  than  the  discounts  offered.   This  promotes  a  healthy 
condition,  as  bills  are  met  promptly,  a  quicker  liquidation 
of  accounts  is  secured,  and  the  credit  system  thereby  im- 

1  A  national  bank  can  only  loan  10%  of  its  paid  in  capital  and  surplus  to  any  one 
individual  or  firm.  The  individual  State  Laws  governing  state  banks  are  modelled 
along  the  same  lines. 


50  THE  MODERN  CREDIT  COMPANY 

proved.  Millions  of  dollars  worth  of  "frozen  credits"  are 
released  yearly  by  this  procedure.  James  Edward  Hagerty, 
author  of  "Mercantile  Credit,"  has  compiled  the  following 
figures  on  the  rate  of  discounts  in  different  trades:  "It 
varies  from  six  per  cent  to  seventy-two  per  cent  a  year, 
while  the  average  annual  rate  is  between  twelve  to  eighteen 
per  cent.  In  fixing  discounts  for  cash,  manufacturers  and 
jobbers  may  wield  a  ready  weapon  to  force  cash  payments. 
As  a  rule  the  longer  the  term  of  credit  the  higher  is  the 
rate  of  discount,  because  the  more  uncertain  the  payment 
of  the  obligation.  Discounts  on  groceries  average  around 
twelve  per  cent  a  year;1  on  textiles  about  eighteen  per  cent; 
while  on  certain  kinds  of  jewelry  the  rate  is  as  high  as 
seventy-two  per  cent  a  year."  It  can  readily  be  seen  that  it 
would  pay  a  concern  to  sell  its  accounts  where  the  rate  of 
discount  it  received  for  making  cash  purchases  for  its  own 
needs  is  greater  than  the  credit  company's  charge. 

In  all  of  the  above  cases  the  author  has  sought  to  show 
that  under  proper  supervision  firms  which  deal  with  the 
credit  company  not  only  profit  thereby,  but  that  such  ac- 
commodation does  not  constitute  a  strain  on,  or  unwise 
expansion  of,  our  general  credit  structure.  As  to  whether 
this  last  fact  is  true  or  not  depends  almost  entirely  upon 
the  supervision  of  each  individual  credit  company. 

1  It  IB  interesting  to  note  that  if  a  concern's  sales  terms  are  1%  for  10  days,  net 
30,  it  would  be  offering  1%  for  only  20  days'  time  (from  the  10  days'  discount  date 
to  the  30  days'  due  date).  Hence  if  Mr.  Hagerty's  figures  are  based  on  1%  for  10  days, 
net  30,  his  discounts  on  groceries  would  be  more  nearly  around  18%  a  year. 


ATTITUDE  OF  BANKERS  51 

(7)  There  is  a  class  of  firms  that  sells  its  accounts  in  order 
to  avert  financial  ruin.    One  of  two  things  eventually 
happens  in  this  case;  the  firm  fails,  or  is  tided  over  its  pre- 
carious condition.  If  it  fails  the  general  creditors  suffer  at 
the  expense  of  the  secured  creditor — the  commercial  bank- 
ing company.   If  it  does  not  fail  the  credit  company  has 
often  saved  the  concern  in  question  from  financial  ruin. 

(8)  Certain  firms  are  in  the  habit  of  borrowing  their 
limit  from  the  bank  on  their  single  name  credit,   and, 
unknown  to  the  banker,  hypothecate  their  accounts  with 
a  commercial  banking  company,  borrowing  additional 
money  on  these.  For  this  reason  many  bankers  object  to 
the  activities  of  the  credit  corporations.    This  is  a  well 
founded  objection,  unless  the  assignor  of  accounts  fur- 
nishes a  true  statement  of  his  assets  and  liabilities  to  the 
credit  company;  and  it,  in  turn,  keeps  its  loans  down  to  a 
safe  margin.    Yet  if  an  individual  practiced  deception  on 
the  bank,  he  would  also  be  very  likely  to  practice  it,  if  to 
his  advantage,  on  the  credit  company,  so  it  in  turn  should 
greatly  discourage  such  a  procedure. 

The  signed  financial  statement  that  customers  submit  to 
their  banks  should  always  contain  a  question:1  "Have  you 
ever  assigned  any  of  your  accounts?"  If  a  borrower  answers 
this  honestly,  a  check  can  be  exercised  on  his  selling  of  his 
accounts.  If  he  stoops  to  deception  and  answers  untruth- 

1.    This  is  the  practice  with  many  banks. 


52  THE  MODERN  CREDIT  COMPANY 

fully,  it  is  very  likely  that  he  would  deceive  the  bank  in 
other  matters,  even  if  no  institution  such  as  the  credit 
company  existed.  It  appears  as  if  it  is  a  question  of  dis- 
honesty on  the  part  of  the  customer,  and  the  commercial 
banking  company  should  be  blamed  only  to  the  extent 
that  it  makes  such  dishonesty  an  easy  practice.1 

(B)  Financing  the  Sale  of  Goods  on  the  Installment 
Plan.  It  has  previously  been  shown  how  the  automo- 
bile dealer  is  financed  in  his  transactions,  both  with  tha 
manufacturer  and  with  his  own  customers.  In  the  ma- 
jority of  instances  the  banks  have  been  unwilling  to  finance 
the  automobile  merchant  as  his  business  was  regarded 
as  involving  too  much  risk.  The  credit  corporation  acts 
as  the  intermediary  between  the  two,  borrowing  from  the 
banks  on  its  own  notes,  secured  by  the  chattel  mortgages 
on  the  automobile  dealer's  cars.  A  very  essential  link  in 
the  credit  chain  is  thus  supplied. 

Is  there  an  unwise  extension  of  credit  in  this  procedure? 
As  the  credit  corporation's  rates  are  fairly  high  the  dealer, 
unless  forced  to,  does  not  take  from  the  manufacturer 
more  cars  than  he  has  reason  to  suppose  he  can  sell.  As 
many  of  these  cars  are  sold  on  credit  to  individuals,  the 
commercial  banking  company's  rates  and  terms  are  such 
as  to  make  him  hesitate  before  buying  on  credit,  unless  he 
has  good  reason  to  think  his  payments  can  be  met.  The 
credit  company  thus  has  its  wholesale  and  retail  plans  act 

1  If  cooperation  between  the  bank  and  credit  companies  or  some  method  of 
recording  were  possible  it  would  tend  to  solve  this  problem;  which  by  many  bankers 
is  considered  the  most  serious  drawback  to  the  activities  of  the  credit  company. 


ADVANTAGES  DERIVED  FROM  THE  CREDIT  COMPANIES  53 

as  a  check  one  upon  the  other,  and  a  mild  restraint  is  ex- 
ercised upon  undue  credit  expansion. 

One  indication  that  the  credit  companies  do  unwisely 
expand  credit  seems  to  be  borne  out  by  the  fact  that  they 
frequently  have  "public  auction  sales"  of  automobiles, 
which  have  been  seized,  due  to  non-payment,  under  the 
chattel  mortgage  or  conditional  sale  of  contract  agree- 
ment. The  frequency  of  these  sales1  and  the  number  of 
cars  sold  in  that  way  determine  whether  the  credit  com- 
panies have  extended  credit  to  foster  a  wise  purpose.  Yet 
would  there  not  exist  to  some  extent  this  same  state  of 
affairs  even  if  the  acceptance  corporation  did  not  supply 
the  needed  credit? 

It  can  be  stated  with  confidence  that  the  credit  com- 
pany fills  a  real  gap  in  the  credit  system  when  it  finances 
the  automobile.  Acting  as  intermediary  between  the 
bank  and  the  dealer,  it  increases  the  possibility  of  its  dis- 
tribution. Nevertheless,  the  number  of  auction  sales  held 
at  periodical  intervals  raises  the  question  of  the  meas- 
ure of  responsibility  attaching  to  them  for  the  injudicious 
purchase  of  automobiles  by  many  who  could  not  afford 
them.  The  credit  companies  have  to  this  degree  extend- 
ed an  unwise  credit.  Yet  these  repossessed  cars  are  sold 
under  the  hammer  and  ultimately  find  their  way  into  the 
hands  of  the  public,  either  direct  or  through  the  medium 
of  a  second  hand  dealer.  They  are  eventually  absorbed. 

1  The  author  is  compiling  statistics  on  this  point  and  hopes  to  have  them  ready 
for  publication  at  a  future  date. 


54  THE  MODERN  CREDIT  COMPANY 

The  following  figures  taken  from  the  statements  of  three 
representative  credit  companies  located  in  Baltimore,  New 
Orleans  and  Chicago  furnish  a  fair  index,  first,  of  the  per- 
centage of  cars  that  are  seized  under  the  conditional  sale  of 
contract  agreement  and  second,  of  the  character  of  the 
assigned  account  business. l  These  figures  were  taken  from 
their  financial  statements  as  of  June  30th,  1921 :2 

Baltimore  Company.  Of  $2,945,853.41  Motor  Lien 
Retail  Time  Sales  Notes,  only  $40,389.03,  according  to 
original  terms  of  sale,  were  over  60  days  past  due. 

Of  $730,367.98  Motor  Lien  Storage  Notes  and  Accep- 
tances, which  includes  some  renewals  and  extensions, 
$21,410.33  were  over  60  days  past  due. 

Of  $7,025,543.54  Open  Accounts,  Notes  and  Accep- 
tances, $181,435.73,  including  $102,265.87  against  Rail- 
roads, Counties,  Cities  and  Towns,  were  over  60  days  past 
due. 

Chicago  Company.  Of  $1,667,106.91  Motor  Lien  Retail 
Time  Sales  Notes,  $36,788.47,  according  to  original  terms 
of  sale,  were  over  60  days  past  due. 

Of  $1,010,741.19  Motor  Lien  Storage  Notes  and  Ac- 
ceptances, which  includes  a  few  renewals,  $19,249.61  were 
over  60  days  past  due. 

1  The  author  asked  the  Chairman  of  the  Boards  of  these  Companies  if  a  particular 
effort  had  not  been  made,  previous  to  the  printing  of  these  statements,  to  close  out  all 
bad  accounts  so  that  a  favorable  showing  could  be  published.    He  replied  that  some 
slight  effort  had  been  made,  but  that  the  above  figures  were  a  pretty  fair  index  of  the 
character  of  the  business  performed  by  each  company. 

2  It  is  not  maintained  that  these  figures  prove  anything,  but  merely  that  they 
show  what  is  possible  of  performance  by  well-regulated  credit  companies. 


CREDIT  COMPANIES  AND   THEIR  CUSTOMERS  55 

Of  $1,617,905.14  Open  Accounts,  Notes  and  Accep- 
tances, $43,138.22  were  over  60  days  past  due. 

New  Orleans  Company.  Of  $1,078,422.66  Motor  Lien 
Retail  Sales  Notes,  $91,451.50,  according  to  original  terms 
of  sale,  were  over  60  days  past  due. 

There  are  undoubtedly  many  cases  where  the  credit 
companies  perform  financing  which  is  not  to  the  best  in- 
terests of  the  business  community.  They  often  furnish 
money  for  enterprises  which  are  unsound,  but  in  which 
they  are  adequately  protected.  It  is  the  borrower,  forced 
to  meet  his  charge  of  one  and  one-half  per  cent  a  month, 
who  faces  ultimate  failure.  Yet  the  fact  remains  that 
some  of  the  older  companies  have  on  their  books  today  cus- 
tomers who  have  been  dealing  with  them  for  years,  and 
each  successive  year  shows  increased  profits  for  the  bor- 
rower. The  author  has  made  an  effort  to  obtain  statistics 
on  this  point.  But  because  of  the  fact  that  the  number  of 
credit  companies,  which  have  been  in  business  a  sufficient 
length  of  time  to  draw  reliable  conclusions,  is  so  small, 
and  because  the  change  in  the  personnel  of  the  customers 
is  so  great,  the  statistics  have  not  been  deemed  of  suffici- 
ent weight  to  publish.1 

However,  the  following  figures  and  statements,  taken 
from  a  confidential  report  of  one  of  the  oldest  and  per- 

1  It  must  be  borne  in  mind  that  the  customers  of  a  credit  company  fall  into 
three  classes:  (1)  Those  who  have  continuously  employed  the  services  of  the  credit 
company  in  the  past,  and  will  continue  to  in  the  future.  (2)  Those  who  employ  the 
services  of  the  credit  company  at  regular  or  irregular  intervals.  (3)  Those  who  use  the 
credit  company  just  temporarily,  and  never  have  recourse  to  it  again.  This  includes 
that  class  which  fails  while  yet  customers  of  the  credit  corporation. 

The  difficulty  of  collecting  reliable  statistics  on  account  of  the  change  in  per- 
sonnel of  the  clients  of  the  credit  company  can  easily  be  perceived. 


56 


THE  MODERN  CREDIT  COMPANY 


haps  best  nationally  known  credit  corporations  in  this 
country  give  the  reader  a  very  clear  insight  into  the  busi- 
ness methods  and  policies  of  a  representative  credit  com- 
pany. 

To  the  question  "What  is  the  usual  size  and  credit 
rating  of  your  customers"?  the  following  answer  was  re- 
ceived: 

"Exclusive  of  motor  vehicle  paper,  for  the  ten 
months  ended  October  31,  1921,  our  gross  purchases 
of  accounts  were  $34,022,131.42,  purchased  from 
and  guaranteed  by  167  different  manufacturers  and 
jobbers  rated  in  Dun  or  Bradstreet,  September  1921 
book  as  shown  below,  also  our  current  accounts  re- 
ceivable, $8,386,848.38  outstanding  October  31,  1921, 
were  purchased  from  and  are  guaranteed  by  such  con- 
cerns similarly  rated,  divided  as  shown  below. 


CUSTOMERS'  RATING 

PURCHASES    10   MONTHS 
OCTOBER   31,    1921 

OUTSTANDINGS  AS  OF 
OCTOBER   31,    1921 

September,  1921 
1st  or  2d  Credit 

Amount 

No. 
Custo- 
mers 

Per 

Cent 

Amount 

No. 
Gusto- 
mere 

Per 
Cent 

$1,999,000  or  over.... 
500,000  or  over.... 
300,000  or  over.... 
125,000  or  over.... 
75,000  or  over.... 
20,000  or  over  .... 
All  other  ratings  or 
no  rating  

$6,332,040.00 
8,787,778.02 
12,395,239.90 
18,121,971.06 
21,278,457.09 
26,299,433.56 

7,665,241.22 

7 
9 
15 
33 
38 
78 

89 

18.6 
25.8 
36.4 
53.3 
62.7 
77.5 

22.5 

$2,215,259.85 
2,922,002.58 
3,724,654.14 
4,803,288.02 
5,779,506.54 
7,014,946.89 

1,371,901.49 

6 
7 
14 
24 
32 
65 

53 

26.8 
34.8 
44.4 
57.3 
68.9 
83.6 

16.4 

"This  shows  that  77  >£  per  cent  of  the  above  pur- 
chases were  made  from  firms  having  a  first  or  second 
credit  rating  in  the  September  1921  Agency  Books, 
and  34.9  per  cent  of  our  customers  have  increased 
ratings  in  the  September  1921  Agency  Books  over  the 
rating  such  customers  had  when  they  began  dealing 
with  us. 


FURNITURE   FINANCING  57 

To  the  question  "Do  you  take  only  a  certain  class  of 
receivables,  e.g.,  (a)  maker  rated  (b)  of  specific  size,  (c) 
any  other  limitation? "  the  following  reply  was  given: 

"A  fixed  policy  of  our  business  is  that  what  we  pur- 
chase should  be  primarily  good  for  amount  of  our  ad- 
vance, and  the  firm  from  whom  same  was  purchased 
considered  secondary,  (a)  We  usually  do  not  take 
over  20  per  cent  of  the  outstandings  with  a  given 
firm  which  is  not  rated  first  or  second  credit,  (b) 
We  watch  and  limit  the  size  of  an  individual  account 
according  to  the  primary  credit  of  the  purchaser, 
secondary  credit  of  the  seller,  or  the  guarantors  on  the 
seller's  contract,  having  in  mind  also  the  margin  with- 
held, (c)  Depending  upon  our  experiences  with  the 
Receivables  of  a  given  concern  as  well  as  the  firm  itself. 

Furniture  Financing.  The  financing  of  the  retail  furni- 
ture dealer  who  sold  on  the  installment  plan  was  described 
in  a  previous  chapter.  Why  is  it  that  the  banks  do  not 
handle  this  business?  In  the  first  place  eighty-five  per  cent  * 
of  all  furniture  is  sold  on  time.  The  reason  for  this  is  that  it 
is  the  only  quasi-necessity  of  life  the  cost  of  which  amounts 
to  several  hundred  dollars.  The  average  purchaser  cannot 
afford  to  pay  out  this  amount  except  over  a  long  period  of 
time.  The  furniture  dealer  must  extend  him  credit.  This 
amounts  in  some  cases  to  as  much  as  two  years.  Banks 
have  not  made  it  the  custom  to  extend  credit  for  so  long 

1  Statistics  furnished  by  "The  Grand  Rapids  Furniture  Record." 


58  THE  MODERN  CREDIT  COMPANY 

a  period.  They  often  ask  for  a  four  or  six  months  note 
from  the  furniture  dealer,  who  usually  finds  it  very  em- 
barrassing to  make  payment  when  the  note  falls  due.  He 
is  thus  considerably  hampered  in  his  business  activities. 
The  credit  company  performs  a  very  much  needed  service. 
It  will  supply  a  much  more  liberal  line  of  credit  than  the 
bank.  The  latter  could  perform  a  similar  service,  except 
for  the  fact  that  it  is  not  equipped  to  investigate  and  super- 
vise to  the  extent  that  the  credit  corporation  is.  Selling 
on  the  installment  plan  is  a  hazardous  business  if  not 
properly  supervised,  but  with  proper  supervision  the  risk 
is  small.  The  average  loss  by  furniture  merchants  on  bad 
debts  is  about  one-half  of  one  per  cent  of  the  total  sales. l 
However,  about  four  per  cent  of  all  furniture  sold  on  the 
installment  plan  is  repossessed  and  resold.2  The  percentage 
would  be  higher  except  for  the  fact  that  the  cost  of  repos- 
sessing and  reselling  is  very  great;  and  most  stores  are  very 
lenient  in  such  matters,  as  they  do  not  wish  to  gain  un- 
called for  notoriety. 

Attitude  of  the  Banker  towards  Credit  Companies.  The 
banker's  main  objections  to  the  activity  of  the  credit 
corporations  are:  (1)  It  is  secret,  (2)  it  fosters  overtrading, 
(3)  it  is  ruinously  expensive,  and  (4)  an  individual  dis- 
poses of  his  best  assets.  (1)  has  already  been  discussed 
in  a  previous  chapter,  and  shown  to  be  no  more  secret 

1  Statistics  furnished  by  "The  Grand  Rapids  Furniture  Record." 

2  These  figures  were  obtained  by  "The  Grand  Rapids  Furniture  Record,"  which  sent 
questionnaires  in  1921  to  the  furniture  merchants  of  the  country.    See  also  article  en- 
titled "Can  People  be  Trusted?"  American  Magazine,  November  issue,  1919. 


OVERTRADING  59 

to  the  general  creditors  of  a  firm  than  the  Notifica- 
tion Plan  (open  assignment  of  accounts  to  a  banker), 
which  is  freely  practiced  by  many  banks.  The  fact  that 
it  is  secret  as  far  as  the  banker  is  concerned  has  just  been 
discussed  in  this  Chapter. 

(2)  Macleod1  says  of  overtrading:  "Numbers  of  mer- 
chants and  traders  purchase  commodities  on  Credit,  that 
is  they  incur  obligations  which  they  must  discharge  at  a 
future  day,  in  the  hope  that  the  returns  will  come  in  before 
the  day  of  payment.  But  the  immense  quantity  of  goods 
poured  in  usually  gluts  the  market  in  a  short  time,  and, 
from  the  excess  of  supply,  prices  tumble  down  often  to 
nothing,  so  that  goods  become  unsalable  and  either  no 
returns  at  all  come  in,  or  such  as  are  quite  inadequate  to 
meet  the  outlay.  When  this  occurs  it  is  called  "Over- 
trading*. 

No  one  realizes  what  is  the  result  of  overtrading  better 
than  the  credit  companies'  officials.  The  more  progressive 
ones  know  that  their  ultimate  existence  depends  upon 
doing  that  which  is  for  the  best  interests  of  their  clients. 
However,  it  is  not  to  be  denied  that  the  credit  companies 
have  in  many  instances  fostered  overtrading.  But  has  the 
United  States  ever  passed  through  a  greater  period  of  expan- 
sion and  overtrading  than  that  just  fostered  by  the  bank- 
ers themselves? 3  The  solution  of  the  problem  is  for  bank- 

1  A  well  known  Scotch  authority  on  credit  and  banking. 

2  See  "Elements  of  Banking"  by  Henry  Dunning  Macleod. 

3  See  Bradstreet's  report  for  the  year  1921. 


60  THE  MODERN  CREDIT  COMPANY 

ers  of  all  descriptions  to  regard  themselves  as  overseers  or 
guardians  of  our  general  credit  structure.  The  many  fail- 
ures of  banking  institutions  of  all  kinds,  due  in  great  part 
to  unwise  expansion,  should  forcibly  impress  this  fact  upon 
the  financial  minds  of  our  country. 

(3)  The  bankers  state  that  selling  open  book  accounts 
is  ruinously  expensive.   The  fact  remains  that  thousands 
of  concerns  sell  their  accounts  and  report  profits.    The 
banker's  contention  that  it  is  expensive  maybe  admitted. 
But  so  is  the  installation  of  labor  saving  machinery  in  a 
factory,  or  the  double  tracking  of  a  railroad  system  expen- 
sive; yet  when  intelligence  dictates  it  few  will  deny  the 
wisdom  of  either  procedure. 

(4)  An  individual  disposes  of  his  best  assets.    The 
answer  to  this  is  that  he  merely  changes  the  form  of  a  non- 
liquid  asset  into  money,  the  best  of  assets. 

The  commercial  banker  should  not  oppose  the  credit 
corporations,  because  they  operate  for  the  greater  part  on 
money  borrowed  from  the  banks.  It  is  impossible  for  the 
former  to  make  a  profit  unless  its  charges  are  greater  than 
what  it  pays  the  bank  for  the  borrowed  money.  In  that 
case  the  business  man  will  seek  accommodation  from  the 
bank  rather  than  from  the  credit  company.  But  there  is, 
and  will  continue  to  be,  a  large  class  of  businesses  that  re- 
quire so  much  supervision,  detail  and  investigation,  that 
the  banks,  not  equipped  to  handle  it,  will  be  forced  to  turn 
it  over  to  the  credit  corporations. 


CONCLUSION  61 

Conclusion.  The  weight  of  evidence  seems  to  be  on  the 
side  of  the  credit  companies.  The  mere  fact  that  a  concern 
is  willing  to  pay  about  one  and  one-half  per  cent  interest1 
or  commission  a  month  to  the  credit  corporation,  and  then 
in  addition  give  proper  security,  shows  that  it  expects  to 
make  a  greater  profit  out  of  the  transaction  itself.  The 
fact  that  hundreds  and  thousands  of  firms  are  yearly  seek- 
ing aid  from  the  credit  companies  and  profiting  by  it  shows 
that  they  fulfill  a  distinct  service  in  our  economic  life.  They 
especially  supply  a  much  needed  link  in  our  credit  chain  in 
the  financing  of  articles  sold  on  the  installment  plan,  for 
there  is  no  other  type  of  institution  in  this  field  adequately 
equipped  to  carry  on  the  work  now  performed  by  these 
companies. 

Credit  corporation  officials  should  realize  the  importance 
of  their  positions  and  appreciate  the  responsibility  of  their 
offices.  They  should  regard  themselves  as  part  guardians 
and  supervisors  of  our  credit  organization;  realizing  that 
they  represent  a  new  type  of  banking  that  is  assuming 
increasing  importance  in  our  financial  life.  It  is  true  that 
some  of  their  business  is  being  absorbed  by  the  banks.  But 
as  old  lines  of  credit  are  taken  away,  new  ones  will  be 
opened  up.  The  field  of  credits  has  only  been  scratched. 
There  are  many  lines  of  business  that  today  are  suffering 
from  want  of  proper  credit  accommodation.  The  com- 


1  Usually  in  the  form  of  a  commission,  as  state  usury  laws  would  prevent  interest 
being  charged. 


62  THE  MODERN  CREDIT  COMPANY 

mercial  banking  companies  should  extend  their  activities 
into  these  virgin  territories. 


CHAPTER  VI 

STATISTICAL  DATA  CONCERNING  CREDIT 
COMPANIES 

There  are  in  the  United  States  approximately  one 
hundred  and  twenty-five  credit  companies.1  This  number 
was  obtained  by  employing  one  of  the  well  known  "Mer- 
cantile Credit  Agencies"  to  write  the  following  letter  to 
sixty-four  of  its  branch  offices  throughout  the  country. 
All  of  the  branch  offices  were  not  written  to,  as  some  were 
located  in  small  towns  or  in  sections  where  they  would  be 
reported  upon  by  a  neighboring  office. 

"Could  you  furnish  us  with  the  names  of  all  finance 
or  credit  companies  which  operate  in  your  territory? 
By  finance  or  credit  companies  we  mean  all  financial 


1  It  is  very  hard  to  determine  the  exact  number  of  credit  corporations,  as  there 
are  many  finance  companies  which  carry  on  a  business  similar  to  that  of  the  credit  cor- 
poration, and  in  addition  perform  other  types  of  financing.  Again  there  are  probably 
a  large  number  of  smaller  concerns  throughout  the  country  which  are  not  included  in 
the  author's  computation.  Private  individuals  also,  in  many  localities,  finance  the  sale 
of  articles  sold  on  the  installment  plan. 

63 


64  THE  MODERN  CREDIT  COMPANY 

institutions  which  purchase  accounts  receivable,  on 
the  Non-Notification  Plan,  or  finance  the  sale  of  any 
article  sold  on  the  installment  plan,  such  as  auto- 
mobiles, trucks,  farming  implements,  furniture,  musi- 
cal instruments,  gas  and  electric  appliances,  etc." 

The  results  were  very  carefully  gone  over  and  every 
effort  was  made  to  eliminate  those  corporations  from  the 
list  which  did  not  come  under  the  author's  definition  of 
credit  companies  as  set  forth  in  chapter  one.  It  is  not 
maintained  that  the  following  figures  are  absolutely  ac- 
curate, yet  it  is  believed  that  they  serve  as  a  fair  index 
of  the  scope  and  activities  of  this  new  type  of  financing 
which  has  assumed  national  importance  within  the  last 
few  years.  In  fact,  the  dates  of  incorporation  of  the 
majority  of  these  companies  are  from  1918  to  1921. 

According,  then,  to  the  author's  computation,  the 
amount  of  paid-in  capital  stock  represented  by  the  credit 
companies  in  the  United  States  is  approximately 
$100,000,000.00.  If  it  is  assumed  that  this  much  is  bor- 
rowed again  from  the  banks,  which  is  indeed  a  very  conser- 
vative estimate,  as  many  of  the  credit  companies  have 
from  two  to  four  times  the  amount  of  their  paid-in  capital 
stock  outstanding  in  collateral  trust  notes,  we  obtain  the 
figure  of  $200,000,000.00.  It  must  be  taken  into  considera- 
tion that  this  capital  is  turned  over  many  times  during  the 
year.  By  a  careful  examination  of  the  volume  of  business 
done  by  many  representative  credit  companies  it  is  safe  to 


EARNINGS  OF  THE  CREDIT  COMPANIES  65 

estimate  that  their  capital  is  turned  over  on  an  average  of 
at  least  six  times  a  year.  If  the  above  obtained  figure  of 
$200,000,000.00  is  multiplied  by  six,  the  substantial  aggre- 
gate of  $1,200,000,000.00  is  arrived  at;  which  will  give  the 
reader  some  idea  of  the  size  and  influence  of  the  modern 
credit  corporation  movement.1 

Earnings.  The  apparently  unusual  profitableness  of 
these  concerns  has  induced  many  to  enter  upon  this  field 
of  activity.  As  a  result  of  this  many  of  the  smaller  com- 
panies today  are  failing  or  on  the  point  of  failure.  The 
gross  earnings  of  a  credit  corporation2  on  its  capital  stock 
are  only  around  eighteen  per  cent.3  When  all  overhead, 
including  taxes  and  losses  on  bad  loans,  are  paid  for,  and  a 
small  surplus  laid  aside,  the  stockholders  would  be  for- 
tunate if  they  obtained  from  six  to  seven  per  cent  on 
their  invested  capital.  But  what  enables  them  to  realize 
more  on  their  investment  is  the  employment  of  the  col- 
lateral trust  note  idea.  By  borrowing  one  or  two  times 
their  paid-in  capital  from  the  banks  at  rates  ranging  from 
six  to  nine  per  cent,  and  then  loaning  this  out  at  about 
eighteen  per  cent,  the  resulting  profit  makes  the  invest- 
ment in  the  stock  of  the  credit  company  a  much  more 
profitable  one,  because  the  overhead  expenses  do  not  have 
the  same  proportionate  increase  as  the  earnings. 


1  The  author  does  not  maintain  that  these  figures  are  accurate,  but  only  that 
they  serve  to  give  some  idea  of  the  size  of  this  new  type  of  financing.   He  believes  that 
they  err  on  the  side  of  conservatism. 

2  That  is,  those  devoted  to  the  assigned  account  business. 

3  This  does  not  include  charges  for  bonding  which  some  of  the  companies  require. 


66  THE  MODERN  CREDIT  COMPANY 

The  deposits  of  a  commercial  bank  bear  an  analogous 
relationship  to  the  collateral  trust  notes  of  the  credit  cor- 
poration. They  both  enable  the  two  institutions  to  make  a 
substantial  profit  on  borrowed  capital.  Of  course,  both 
the  bank  and  the  credit  company  have  to  stand  back  of 
borrowed  money  and  be  prepared,  in  the  case  of  the  one  to 
pay  it  back  upon  call  or  thirty  days  notice,  and  in  the  case 
of  the  other  at  maturity. 

It  is  an  indisputable  fact  that  the  profits  of  a  credit  com- 
pany would  be  scant  and  meagre,  if  it  were  not  for  the 
employment  of  the  collateral  trust  note  idea.  The  detail, 
supervision  and  risk  would  take  a  large  bulk  of  the  eigh- 
teen per  cent  gross  profit,  so  the  only  fact  that  makes  the 
credit  corporation  a  really  profitable  enterprise  is  the  in- 
creased capitalization  obtained  by  means  of  borrowed 
money.  It  is  the  same  procedure  that  makes  bank  stock 
profitable.  So  it  seems  that  any  outcry  against  the  profits 
of  a  credit  company  or  its  charges,  as  long  as  they  are  con- 
fined to  arbuhd  eighteen  per  cent.1  should  be  held  equally 
applicable  to  the  profits  of  banks.  They  both  perform 
types  of  financing.  Only  the  credit  company's  service  is 
of  such  a  character  that  it  requires  much  more  investiga- 
tion, supervision  and  detail  than  the  banks;  so  a  higher 
fee  is  charged. 

I  This  does  not  include  charges  for  bonding  which  some  of  the  companies  require. 
Also  the  gross  charge  of  credit  companies  devoted  to  the  financing  of  articles  sold  on 
the  installment  pi  an  amounts  to  more  than  eighteen  per  cent.  The  ostensible  charge 
is  around  twelve  per  cent,  but  as  the  installment  notes  are  paid  off  monthly  the  actual 
charge  is  thus  much  greater  than  eighteen  per  cent.  Yet  it  must  be  remembered  that 
there  is  an  enormous  amount  of  detail  work  and  supervision  involved.  In  addition  the 
charge  must  be  such  as  to  compensate  for  the  risk  assumed,  and  to  provide  for  the  pos- 
sible cost  of  repossession  and  resale. 


EARNINGS  OF  THE  CREDIT  COMPANIES  67 

In  order  to  show  the  comparative  profitableness  of  the 
two  types  of  institutions  there  are  reproduced  below  the 
present  dividend  rates  based  on  the  par  values  of  the 
stocks  of  all  the  principal  banks,  trust  companies  and  cred- 
it corporations  in  the  City  of  Baltimore.  Baltimore  is  pop- 
ularly, though  mistakenly,  known  as  the  home  of  the 
"Credit  Companies."  The  movement  started  there  at 
an  early  date  (1909)  and  has  grown  to  great  proportions 
in  that  locality.  In  fact,  Baltimore  boasts  of  some  of  the 
most  successful  and  prosperous  credit  companies  in  the 
United  States.  For  this  reason  the  author  feels  that  the 
following  comparison,  containing  some  of  the  most  suc- 
cessful of  the  credit  corporations  in  the  country,  should  be 
regarded  as  a  high  index  of  their  earnings.1 

QUOTATIONS  OF  THE  STOCKS  OF  BANKS, 

CREDIT  AND  TRUST  COMPANIES  LOCATED 

IN  BALTIMORE  (As  of  January  27th,  1922.) 

BANES  Par        Paid  in      Div. 

Capital 

Baltimore  Commercial  Bank ...  100 

CalvertBank 50 

Canton  National  Bank 100 

Citizens  National  Bank 10 

Commonwealth  Bank 50 

Drovers  &  Mechanics  National  Bank 100 

Farmers  &  Merchants  National  Bank 40 

Merchants  National  Bank 10 

National  Bank  of  Baltimore 100 

National  Bank  of  Commerce 15 

National  Exchange  Bank 100 

National  Marine  Bank 30 

National  Union  Bank 100 

Old  Town  National  Bank 10 

Second  National  Bank        .  100 

Western  National  Bank ! 20 

1.     These  statistics  taken  of  credit  companies  in  other  cities  might  not  show  as 
h  a  degree  of  earning  power. 


68 


THE  MODERN  CREDIT  COMPANY 


TRUST   COMPANIES 

Baltimore  Trust  Company 60        1,000,000  20%  155 

Colonial  Trust  Company 25            300,000     7%  33K 

Continental  Trust  Company 100         1,350,000  12%  160 

Equitable  Trust  Company 25         1,250,000     8%  40 

Fidelity  &  Deposit  Company 50        3,000,000  16%  112 

Fidelity  Trust  Company 100         1,000,00016%  295 

Maryland  Trust  Company 100         1,000,000     6%  112K 

Mercantile  Trust  &  Deposit  Company 50         1,500,000  20%     2%  Ex.  210 

Safe  Deposit  &  Trust  Company 100        1,200,000  20%  510 

Security  Storage  &  Trust  Company 100           200,000  10%  2^%  EX.170X 

Title  Guarantee  &  Trust  Company 100            200,000  20%  205 

Union  Trust  Company 50           500,000  10%     2%  Ex.     91K 

CREDIT  COMPANIES 

Baltimore  Acceptance  Company: 

Preferred 25           300,000     7%  25 

Common  No  par  value 5,000    0%  25 

Commercial  Credit  Company:  Shares 

Preferred 25        1,500,000    7%  25^ 

Preferred  B 25        1,500,000     8%  26 

Common 25        1,500,000  12%  51 

Federal  Finance: 

Preferred 100           700,000     7%  100 

Common,  No  par  value 0%  50 

Finance  Company  of  America: 

Preferred 25              18,000     7%  24 

Common 25           150,000    6%  27^ 

Finance  &  Guaranty  Company: 

Preferred 25            466,025     7%  25 

Common 25           350,000  10%  36X 

Finance  Service: 

Preferred 10           278,880     7%  8 

Common 10           163,370  10%  12J4 

Guaranty  Company: 

1st  Preferred 100  500,000    7%  100 

2d  Preferred 100  500,000    8%  100 

Common 1  33,000     0%  15 

Maryland  Finance  Corporation: 

Preferred 100           179,000    7%  100 

Common 1             14,450    0%  5 

Manufacturer's  Finance  Company: 

1st  Preferred 25           800,000     7%  25 

2d  Preferred 25           300,000     7%  25 

Common 25           800,000  16%  43 

National  Credit  Corporation: 

Preferred 100,000    7% 

Common 


It  is  not  maintained  that  any  accurate  conclusions  can 
be  drawn  between  the  relative  profitableness  of  these  three 
types  of  institutions,  due  to  the  fact  that  the  banks  and 
trust  companies  have  been  engaged  in  business  for  a  much 
longer  period  than  the  credit  companies.  However,  the 


STOCKS  OF  BANKS,  TRUST  AND  CREDIT  COMPANIES       69 

popularly  supposed  phenomenal  earnings  of  credit  cor- 
porations are  shown  to  be  entirely  mythical.1 

It  is  interesting  to  note  that  a  credit  company's  com- 
mon stock  can  be  very  profitable  if  preferred  stock  and 
collateral  trust  notes  are  outstanding  to  several  times  the 
amount  of  common.  A  fixed  rate  of  approximately  seven 
to  eight  per  cent  is  paid  on  the  preferred  and  the  notes. 
All  the  earnings  of  the  total  capitalization  over  this  charge 
are  then  applicable  to  the  relatively  small  amount  of  com- 
mon stock.  For  example,  take  the  Commercial  Credit 
Company  of  Baltimore  with  its  $1,500,000  first  preferred, 
its  $1,500,000  second  preferred,  its  $1,500,000  common,  its 
average  of  approximately  $7,000,000  collateral  trust  notes 
outstanding  and  its  $1,300,000  surplus  and  undivided 
profits.  In  addition  to  this  it  owns  all  of  the  common 
stock  in  two  other  credit  corporations,  The  Commercial 
Acceptance  Trust  of  Chicago,  and  The  Commercial  Credit 
Company,  Incorporated,  of  New  Orleans.  The  Baltimore 
Company  obtains  the  benefit  of  the  surplus  earnings  of 
these  other  two  companies.  The  history  of  the  common 
stock  of  the  Commercial  Credit  has  thus  been  one  of  sub- 
stantial dividends,  with  frequent  extra  disbursements. 
As  pointed  out  by  the  chairman  of  its  Board  of  Directors, 
this  has  been  due  to  its  favorable  form  of  capitalization 
rather  than  to  the  extremely  large  earnings  generally 
credited  to  it.2 


1  At  least  as  far  as  those  located  in  Baltimore  are  concerned. 

2  For  example  a  net  earning  of  only  fourteen  per  cent  on  its  Stockholders'  Invest- 
ment (Capital,  Surplus,  and  Undivided  Profits;  means  about  forty  per  cent  ne  ton  its 
common  stock. 


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THE CORPORATION 

CONTRACT 

1  This  Agreement  entered  into  between 

2  designated  as  first  party,  and  THE CORPORATION,  a corpora- 

3  tion,  its  successors  or  assigns,  designated  as  second  party. 

4  Witnesseth,  That  Whereas  first  party  is  desirous  of  selling  to  second  party,  Accounts  Receivable, 

5  Notes,  Leases,  Mortgages,  Contracts  and  Choses  in  Action,  hereinafter  designated  as  "Accounts," 

6  evidencing  sales  and  deliveries  of  personal  property  usually  dealt  in  by  first  party.     Now  Therefore,  in 

7  consideration  of  the  premises,  the  statements  made  to  the  second  party  regarding  the  financial  condition 

8  of  the  first  party,  and  the  mutual  covenants  hereinafter  mentioned,  the  parties  hereby  agree  as  follows: 

9  FiRiT.     Second  party  will  from  time  to  time,  during  the  continuance  of  this  agreement  and  within 

10  the  limits  agreed  upon,  buy  such  Accounts,  belonging  to  first  party  as  may  be  acceptable  to  second  party, 

11  and  will  pay  therefor. 

12  One  hundred  per  cent  (100%)  of  the  net  face  value  thereof,  less  a  charge  equal  to  the  legal  rate 

13  of  interest  on  the  money  outstanding  thereon,  on  which  -77-  per  cent  of  the  net  face  value  thereof  shall 


17  that  no  payments  of  any  such  remainder  need  be  made  so  long  as  any  Accounts  purchased  hereunder  are 

18  affected  by  any  breach  or  violation  of  warranty  hereunder,  but  such  remainder  and  any  moneys, 

19  Accounts  or  property  of  first  party  which  may  come  into  possession  of  second  party  may  be  held  and 

20  applied  to  the  payment  of  any  such  Accounts. 

21  SFCOND.     In  order  to  obtain  from  second  party  the  right  and  privilege  which  are  hereby  given, 

22  to  make  collection  at  its  office  and  expense  of  all  Accounts  sold  to  second  party  and  thereby  avoid 

23  objections  by,  and  any  possible  loss  of  trade  from  any  of  its  customers,  through  second  party  collecting 

24  the  Accounts  direct  from  the  Debtors,  first  party  will  pay  second  party  for  the  salaries  and  all  expenses  ot 

25  travel  of  auditors  of  second  party,  who  shall  have  the  right  to  call  every  thirty  days  or  oftener  and  mspect.f 

26  audit,  check  and  make  extracts  from  the  books,  Accounts,  records,  orders,  original  correspondence  and 

27  other  papers  of  first  party  relating  to  Accounts  sold  hereunder  as  provided  in  any  fidelity  bond  which 

28  may  be  obtained  by  second  party;  said  right  and  privilege  may  be  terminated  by  second  party  at  any  tune, 

29  and  shall  terminate  immediately  upon  the  suspension  of  business,  request  for  general  extension,  bank- 

30  ruptcy  petition,  or  any  act  amounting  to  a  business  failure,  by  or  against  first  party.     First  party  war- 

31  rants  that  it  will  transmit  or  deliver  to  second  party  at  its  office  in on  the  day  of 

32  receipt  thereof,  all  original  checks,  drafts,  notes  and  other  evidences  of  payment  received,  in  payment  of, 

33  or  on  account  of,  any  Accounts  purchased  hereunder. 

34  TH  'RD.     Second  party  will :  (a)  Place  its  collection  department  at  the  disposal  of  first  party,  and 

35  upon  request  endeavor  to  collect  direct  from  the  debtors  any  Accounts  purchased  hereunder.     (b)  Have 

36  its  auditor  give  first  party  his  report  of  each  examination  as  above,  with  full  instructions  as  to  the  best 

37  method  of  keeping  the  books,  records  and  Accounts  of  first  party,     (c)  Place  its  credit  department  at  the 

38  disposal  of  first  party  and  pay  for  all  accounting,  postage  and  credit  investigation  of  Accounts  purchased 

39  or  offered  for  purchase  hereunder  and  upon  request  give  credit  and  financial  advice,     (d)  Have  its 

40  employees  at  the  request  of  first  party  instruct  first  party  how  to  increase  sales,  organize  the  business  of 

4 1  first  party  in  an  efficient  manner,  and  increase  the  profits  of  first  party,     (e)  Permit  first  party  to  submit 

42  any  of  its  sales  contracts  with  its  customers  to  the  General  Counsel  of  second  party  for  advice  and  opin- 

43  ion  as  to  the  form  and  legality  thereof,     (f)  Accept  at  par  subject  to  payment  all  remittances  received 

44  through  first  party,  and  pay  the  cost  of  all  exchanges  on  same,     (g)  Obtain  and  have  on  hand  at  all  times 

45  sufficient  funds  to  make  prompt  remittance  to  first  party  for  all  acceptable  Accounts  within  the  limits 

46  agreed  upon,     (h)  Supply  all  forms  proper  for  assignment  of  Accounts  hereunder  and  assist  in  the 

47  prompt  collection  thereof. 

48  FOURTH.     The  total  compensation  to  be  paid  by  first  party  for  all  services  and  other  considera- 

49  tions  specified  in  lines  12  to  16  hereof,  added  t  :  the  charge  as  mentioned  in  lines  12  and  13  hereof,  it  is 

50  hereby  agreed  shall  be: 
51 

62 

8 

55 
56 
67 
58 
59 
60 


61  FIFTH.    In  consideration  of  the  prompt  purchase  and  remittance  by  second  party  for  Account* 

62  acceptable  to  second  party,  without  waiting  to  make  a  complete  credit  investigation  thereof,  first  party 

63  hereby  warrants  that:  (a)  First  party  and  each  debtor  named  in  an  Account  is  solvent  and  will  remain 

64  so  until  maturity  thereof;  (b)  There  will  be  no  suspension  of  business,  request  for  general  extension, 

65  bankruptcy  petition,  nor  any  act  amounting  to  a  business  failure  by  or  against  first  party  or  any  debtor 

66  (c)  Every  Account  purchased  hereunder  and  any  settlement  received  thereon  will  be  paid  in  full  at 

67  maturity  in  cash  or par  funds;  (d)  Prompt  payment  will  be  made  to  second  party  of  the  net 

68  invoice  value  of  any  goods  returned,  rejected,  re-sold,  re-routed  in  transit,  or  of  any  allowance  or  credit 

69  upon  any  Account  sold  to  second  party;  (e)  Each  Account  offered  for  sale  to  second  party,  shall  repre- 

70  sent  a  bona-fide  sale  and  delivery  of  property  usually  dealt  in  by  first  party,  and  shall  be  for  a  certain 

71  undisputed,  liquidated  claim  or  demand,  which  is  due  or  to  become  due  on  the  dates  set  forth;  (f)  First 

72  party  will  not  sell  or  assign  any  of  its  own  Accounts  elsewhere  without  first  giving  ten  days'  written 

73  notice  to  second  party  of  such  intention. 

74  SIXTH.     Contemporaneously  with  the  purchase  of  Accounts  hereunder,  first  party  will,  by  proper 

75  instrument  in  writing,  assign  and  set  over  to  second  party  such  Accounts  purchased  by  it  as  aforesaid, 

76  to  the  end  that  second  party  may  be  and  become  surrogated  to  all  of  the  rights,  securities  or  guaranties 

77  possessed  by  the  first  party  in  respect  thereto,  including  the  right  of  stoppage  in  transit;  should  the  latter 

78  right  be  exercised,  or  should  the  debtor  named  in  any  account  fail  or  refuse  to  accept,  receive  or 

79  retain,  or  return  the  property  evidenced  by  such  Account,  or  should  said  property  be  re-routed  or  re-con- 

80  signed,  then  the  title  to  said  property  or  property  exchanged  therefor,  with  the  right  to  sell  or  otherwise 

81  dispose  thereof,  and  the  title  to  any  new  Account  created  through  the  re-sale  thereof,  shall  be  and 

82  remain  in  said  second  party.     Immediately  upon  consummation  of  the  purchase  of  Accounts  hereunder, 

83  the  first  party  will  make  upon  its  books  suitable  and  proper  entries  disclosing  the  absolute  sale  of  said 

84  Accounts  to  second  party.     First  party  further  will  execute  and  deliver  to  second  party  any  instrument 

85  necessary,  proper  or  convenient  to  carry  into  effect  the  terms,  provisions  and  conditions  of  this  agree- 

86  ment,  or  to  facilitate  the  collection  of  Accounts  purchased  hereunder. 

87  SEVENTH.     If  any  warranty,  expressed  or  implied,  made  herein  or  resulting  from  the  provisions 

88  hereof  with  respect  to  any  Account  or  made  in  or  resulting  from  the  provisions  of  the  assignment  of 

89  any  Account  to  second  party  or  from  the  subject  matter  hereof,  shall  be  broken  or  violated,  either 

90  through  the  act  of  first  party  or  others,  the  damages  which  second  party  shall  be  entitled  to  recover 

91  from  first  party,  as  a  result  thereof,  shall  include  all  attorney's  fees,  Court  costs  and  all  other  expenses 

92  which  may  be  expended  or  incurred  by  second  party  to  obtain  or  to  enforce  payment  of  Account  pur- 

93  chased  hereunder,  either  as  against  the  debtor,  first  party,  or  any  of  its  guarantors,  or  in  the  prosecution 

94  or  defense  of  any  action  or  concerning  any  matter  growing  out  of  or  connected  with  the  subject  matter 

95  of  this  contract,  and  Accounts  purchased  thereunder.     Granting  extensions  to,  or  adjustments  of  claims 

96  of  debtors  named  in  Accounts  purchased  hereunder,  compromises,  compositions  or  settlements  of  such 

97  Accounts,  either  with  the  debtor  or  others,  or  of  the  sale,  assignment  or  transfer  of  Accounts  thereunder 

98  by  second  party,  shall  not  affect  the  liability  of  first  party  under  any  of  its  warranties  as  herein  provided. 

99  EIGHTH.     First  party  does  hereby  make,  constitute  and  appoint 

100  or ,  or  any  person  whom  either  or  second  party  may 

101  designate,  its  true  and  lawful  attorney,  with  power  to  receive,  open  and  dispose  of  all  mail  addressed 

102  to  first  party;  to  endorse  the  name  of  first  party  upon  any  notes,  checks,  drafts,  money  orders  or  other 

103  evidence  of  payment  or  collateral  that  may  come  into  the  possession  of  second  party  of  or  upon  Accounts 

104  purchased  by  it  hereunder;  to  endorse  the  name  of  the  first  party  on  any  invoice,  freight  or  express  bill 

105  or  bill  of  lading  relating  to  any  said  Account;  to  sign  the  name  of  first  party  to  drafts  against  debtors, 

106  to  assignments  and  verifications  of  Accounts  and  notices  thereof  to  debtors;  and  to  do  all  other  things 

107  necessary  or  proper  to  carry  out  the  intent  of  this  agreement. 

108  NINTH.     Neither  of  the  parties  hereto  shall  be  bound  by  anything  not  expressed  in  writing  by 

109  and  between  the  parties;this  agreement  and  all  of  its  provisions  shall  inure  to  and  become  binding  upon 

110  the  parties,  their  heirs,  executors,  administrators,  successors  and  assigns  only  after  acceptance  by  two 

111  duly  authorized  officers  of  second  party;  the  provisions  of  this  agreement  shall  be  construed  and  inter- 

112  preted  in  accordance  with  the  laws  and  decisions  of  the  State  of first  party  hereby  waives 

113  all  notice  of  any  matter  to  which  it  might  otherwise  be  entitled,  also  waives  presentment,  demand  any 

114  protest  of  any  note,  draft  or  other  evidence  of  payment;  either  party  hereto  shall  have  the  right  at  and 

115  time,  upon  written  notice,  to  cancel  this  agreement  as  to  future  transactions. 

IN  WITNESS  WHEREOF,  first  party  has  caused  these  presents  to  be  executed  this 

day  of 19 

ATTEST 

or  Signed (Seal) 

WITNESS  President,  Partner  or  Owner. 

Accepted  by  THE CORPORATION,  this 

day  of 19 

By (Seal) By (Seal) 

Treasurer  or  Ass't.  Treasurer.  President 


THE  FOLLOWING  GUARANTY  AND  WAIVER  IS  TO  BE  SIGNED  BY  INDIVIDUALS. 

In  consideration  of  the  acceptance  by  "second  party,"  of  the  aforementioned  agreement  between  the 
"first  party"  and  "second  party,"  of  other  valuable  considerations,  and  of  the  sum  of  One  Dollar  in  hand 
paid  to  each  of  the  undersigned,  the  receipt  of  which  is  hereby  acknowledged,  the  undersigned  and  each  of 
them  do  hereby  jointly  and  severally  guarantee  to  second  party,  its  successors  or  assigns,  the  full  and  prompt 
payment,  performance  and  discharge  by  first  party  of  said  agreement,  and  of  each  and  every  of  the  agree- 
ments, terms,  provisions,  and  conditions  set  forth  in  said  agreement,  and  of  any  rider  or  riders  to  be  thereto 
attached,  and  of  any  other  instrument  or  instruments  given  or  executed  in  pursuance  thereof,  provided  to 
be  done,  paid  or  discharged  by  the  first  party,  and  the  due  execution  thereof.  The  undersigned  and  each 
of  them  do  hereby  agree  that  the  liability  hereunder  shall  be  direct  and  not  conditional  upon  the  pursuit  by 
the  second  party,  its  successors  or  assigns  of  whatsoever  remedies  it  or  they  may  have  against  said  first 
party,  and  shall  continue  until  second  party  receives  written  notice  revoking  said  liability  on  future  accounts 
or  transactions,  and  they  and  each  of  them  do  hereby  waive,  release,  assign  and  transfer  to  second  party, 
so  far  as  the  obligation  herein  is  concerned,  all  rights  in  and  to  homesteads  and  exemptions  to  which  they  or 
any  of  them  may  be  entitled  under  the  laws  of  any  State  or  States. 

This  guaranty  and  waiver  shall  be  construed  and  interpreted  according  to  the  laws  and  decisions 

of  the  State  of The  undersigned  hereby  jointly  and  severally  waive  all  notice  of  default    by 

first  party,  and  waive  notice  of  acceptance  of  the  guaranty  by  second  party,  and  waive  ail  other  notices 
to  which  they  might  be  otherwise  entitled. 

IN  WITNESS  WHEREOF,  we  have  hereunto  set  our  hands  and  seals  this 

day  of 19.... 

Witness „ —        Signed 

Witness .. Signed.. 

Witness Signed 

Witness Signed 


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INDEX 

Page 

Accounts  Receivable 5 

Agency  Contract 9 

terms  of 24 

American  Acceptance  Council 37 

American  Magazine 58 

Amsterdam 3 

Astpr,  John  Jacob 3 

Assigned  Accounts 17,  40 

amount  advanced  on 24 

analyzed  as  a  method  of  payment 41 

Assignee 8 

Assignment 

discussion  of 23 

of  book  accounts 6,  47 

priority  of 10 

rights  of , 7 

so-called  secret 22 

Assignor 

of  accounts 6 

Assyrian  Inscriptions 36 

Attitude  the  Banker  should  take  towards  Credit  Companies 60 

Auditors  of  Credit  Companies 24 

activities  of 26 

Auto-Finance  Company 29 

Auto-Financing  Credit  Men's  Association,  Inc 32 

description  of 32 

Automobile  Financing ; 31 

retail  plan 31 

wholesale  plan 31 

Bankers'  Acceptances 5 

Bankers'  Attitude  towards  Credit  Companies 58 

Bills  of  Exchange 4,  36 

Bills  Receivable 5 

Bonding 28,  29 

Bradstreet  Company,  the 7,  56,  59 

Brokerage  House 16 

commission  it  usually  charges 16 

places  notes  of  credit  companies 16 

Cape  of  Good  Hope 3 

Capital  Stock  of  Credit  Companies 64 

estimated  amount  of 64 

Classes  of  Concerns  which  sell  their  Accounts 27,  28 

Classification  of  Finance,  Credit,  and  Discount  Houses 5 

Collateral 17 

consisting  of 17,  18 

Collateral  Trust  Agreement 14 

terms  of 15 

Collateral  Trust  Notes. ...  14 


Page 

duration  of 15 

interest  they  bear 15 

laws  affecting  them 15 

maturity  of 18 

sale  of 42 

security  of 16 

type  of  bank  taking  them 15 

Commercial  Acceptance  Company 4,  30 

Commercial  Banking  Company 4,  8,28 

Commission  Houses 7 

Contracts 34 

of  additional  sale 34 

Credit  Company,  definition  of 4 

articles  of  incorporation  of 12 

attitude  their  officials  should  take 61 

charges  of 28,  60 

common  stock  of 11 

customers  of 13 

directors  and  officers  of 13 

formation  of 11 

incorporation  of 11 

number  of 63 

place  they  fill  in  our  economic  life 61 

par  value  of  stock 12 

preferred  stock  of 11 

sale  of  stock  of 12 

the  turnover  on  their  capital 

Creditors 21,  22,  23 

Crisis    of 18,    73,    37 

Customers  of  Credit  Companies 13,    55 

size  of  some 56 

rating  of  some 56 

Debtor 20,    21 

Depository  Banks 15,     16 

of    credit    companies, 15 

terms  of  agreement  with  credit  companies 15 

Discount  Companies 4 

Dun,  R  G.  &  Co 25,   56 

Duncan,   A.  E 7,  10,  22,  V 

Dutch  East   Indies 3 

Earnings  65 

compared  to  banks 66 

not   phenomenal 65,    66 

table  of  companies  in  Baltimore  67,  68 

why  in  some  instances  they  seem  large 1,  69 

Essential  Link  in  the  Credit  Chain  supplied  by  the    Credit 

Corporation 61 

as  a  purchaser  of  Receivables 47,  48,  49 

in  financing  the  sale  of  goods  disposed  of    on  the  install- 
ment plan 53,  58 


Page 

Factors 7,  20 

Federal  Reserve  Bank 14,  40,  42 

method  of  discounting 14 

Federal  Reserve  Board 38 

attitude  on  acceptances 38 

Finance   Company 4,   17,   28,   63 

Financing    of    Particular    Trades 9,    20 

Financial   Statement 51 

Furniture 9 

financing  of  analyzed 57 

financing  of  furniture  business 34 

profits  of 34 

Grand  Rapids  Furniture  Record 34,  57,  58 

Hollander,    Jacob  H V    and    VI 

Incorporation 7,   64 

H  dates  of 7 

Investigation  of  Credit  Standing 25 

of  credit  companies'   customers 25,  26 

Installment  plan,  financing  on 5 

articles    sold    on 9,  35 

automobiles 9,   64 

farming  implements 9,    35,    64 

furniture 9,  64 

detailed    consideration    of 29 

gas  and  electric  appliances 9,  35,  64 

justification  of 52,    53 

Insurance 33 

kinds  employed 33 

method  of  placing 33 

of  automobile 33 

Interlocking  Directorates 17 

Jones,  Arthur  R 8,   24,   V 

Klein,  Joseph  J 4,     37 

Little,  John  L 8 

Mackall,  Luther  E 29 

Macleod,  Henry  Dunning 36,  37,  59 

Mathewson,  Park 39 

Mercantile,  Credit  Company 7,  8 

Montesquieu 37 

Esprit  desLois 37 

Non-Notification  Banker 10 

legislation  introduced  by 23 

Non-Notification  Plan 9,  64 

definition  of 21 

laws  affecting 22 

Notificaton  Plan 21,  59 

description  of 21 

laws  affecting 22 

Number  of  Credit  Companies 10,  63 

Open  Accounts 5 


Page 

Open  Book  Accounts 20 

assignment  of 6,  17 

justification  of  sale  of 47,  48,  49,  50 

purchase  of 20 

Origin  of  first  Credit  Company 8 

Overtrading 59 

Preferred  Stock 11,  18 

Prendergast 6,  38 

Public  Auction  Sales 53 

Receivers 10 

Rediscounting 38 

by  credit  companies 41 

by  Federal  Reserve  Bank 38 

by  member  banks 41 

eligibility  of  trade  acceptance  for 38 

preferential  rate  of 40 

Receivables 4 

Repossession  of  Furniture 58 

Selling  of  Open  Book  Accounts 26 

reasons  for 27 

Solicitors 13,  26 

Supreme  Court  of  Illinois 9 

Suez  Canal 3 

Terms  of  Credit 5 

before  the  Civil  War 37 

in  the  East 37 

in  the  furniture  business 58 

in  the  West 37 

now  prevalent  in  U.  S 5 

prevailing 38,  39 

Trade  Acceptances 5,36,41 

advantages  of 42 

analyzed  as  a  method  of  payment 41 

definition  of 38 

in  Canada 39 

in  Europe 39 

reason  the  movement  has  grown  so  slowly 43,  44,  45,  46 

summary  of  arguments  for 42 

theory  of 40 

Trust  Company 19 

Working  Capital  of  Credit  Company 17 

composed  of 11,  17 

increased  by 17 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN     INITIAL    FINE     OF     25     CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  5O  CENTS  ON  THE  FOURTH 
DAY  AND  TO  S1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


OCT    1  1932 

SEP  1^1936 

AU&f     195* 
ER-MBFU'R 


8*  I960 


, 


a  i 


1 . 1 )  'J  ! 


YB   18063 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


